Can I enter into a Trust Deed as a sole trader when my business is struggling?

July 6, 2017

Being in debt as a sole trader can be particularly concerning because you are personally responsible for the debts of your business. Unlike a limited company which is a separate legal entity from its owners/directors, sole traders face the prospect of personal bankruptcy alongside the closure of their business.

There are a number of debt solutions that could help, however, and one of these is called a trust deed. It is only for Scottish residents, and allows you to repay a pre-agreed proportion of your debts, whilst writing off the remainder.

Are you eligible for a trust deed as a sole trader?

An insolvency practitioner, or money advisor, will let you know whether or not you meet the eligibility requirements for a trust deed. These include:

  • Being a resident of Scotland
  • Owing a minimum of £5,000 in unsecured debt
  • Providing the necessary financial information and documentation to allow an informed assessment of your financial position
  • Being able to pay a monthly amount from your income towards the debt

Clearly, if your business is struggling, making a regular monthly payment in this way might be difficult. It does not discount you, however, and your individual circumstances will be taken into account by the trustee.

The financial issues your business is experiencing may be viewed as temporary when looked at closely by your money advisor, who will see the whole picture of your personal and business finances combined.

How a protected trust deed works in practice

Once your trustee has put together a proposal, creditors vote on whether to accept the monthly repayment and level of debt that will be written off at the end of the trust deed – a term usually lasting four years.

It is often in the creditors’ interests to agree a proposal, as the amount that can be recovered may be more than if you were sequestrated (the term for bankruptcy in Scotland).

The trust deed becomes protected if creditors agree to the terms, after which they are no longer able to take legal action against you in relation to the debts included. All charges and interest are also stopped, giving you a valuable breathing space to take back control of your business finances.

What unique issues might you face as a sole trader in these circumstances?

  • The nature of being a sole trader means that your income will fluctuate from month to month. This makes it difficult to establish a figure for your monthly repayment to the trust deed – for employed people, this is less of an issue as income is generally more stable. This problem can be addressed if your money advisor looks at your accounts, and uses historic and projected income figures to arrive at a fair estimation for the trust deed repayment.
  • If your business and personal bank accounts are held with the same institution, you will need to open a new business account with a different bank before the trust deed begins – the original accounts are likely to be closed down when you enter the trust deed.
  • You will not be able to access further business borrowing for the duration of the trust deed, and will find it very difficult to do so for some years afterwards. A note of the trust deed remains on your credit file for six years.

There are many considerations to take into account if you are thinking of entering a trust deed as a sole trader. Scotland Debt Solutions can make sure you understand the benefits and drawbacks, and provide the professional advice you need. Call our highly experienced insolvency practitioners to arrange a same-day appointment free-of-charge.