The novelist Ernest Hemingway has a character in one of his novels describe how he became bankrupt, and he says that it happened two ways: “gradually, then suddenly”. You may have experienced something similar – a gradual accumulation of tax or business debts has suddenly become critical, and you face being made bankrupt by creditors or by HMRC.

If you owe HRMC more than £2000, you will probably have asked them for time to pay. However, you may not have been able to agree terms with them. They can be pretty stringent in their demands. If they can’t agree a payment schedule with you, they will try to get the money in other ways, such as through a court judgement, by seizing goods from your business or from you personally, depending on the circumstances. If they’re not able to do this, then your case may be passed to their Enforcement and Insolvency Office (EIO) with the understanding that they will act to make you bankrupt.

Yes, there’s another of those heart-sinking bankruptcy and tax debt letters on the way. Fight the temptation to hide it under the bed, because although it will be the EIO asking for the debt to be settled (usually within 14 days) at this stage, the EIO will sometimes agree a schedule for repayments.

The Statutory Demand

The path to bankruptcy starts with something called the statutory demand, a letter that is usually delivered to you by hand. This will contain the sum of tax that is owed and will ask for payment inside 21 days. Attempts to challenge the statutory demand – because the tax is only an estimate, for example – are very unlikely to succeed. HMRC tax certificates showing that they’ve charged you with the tax are accepted by the court as evidence that you owe the money.

Once they’ve served you with the statutory demand, they wait three weeks and then HMRC can, if it wants, present a bankruptcy petition. This tells you how much tax you owe and when your case will be presented at the Bankruptcy Court.

However, HMRC doesn’t always ask for bankruptcy once it’s issued the Statutory Demand. For some people, this is the worst of both worlds: at least an HMRC-instigated bankruptcy would allow them to get on with the rest of their lives. Sometimes these people decide they can’t carry on not knowing when the axe is going to fall, and they decide to petition for their own bankruptcy. At least then they know where they are – possibly not a great place, but they can finally move on.

Some resourceful types think that if they keep out of the way, HMRC won’t be able to serve the bankruptcy petition on them. Unfortunately, if HMRC can’t find the person they want to serve, the court can allow the petition to be served by post or by advertising.

Negotiating with the Bankruptcy Court

Many people ask the court to adjourn their case for a couple of months to give them time to try to find the money being demanded. You may still be able to reach a payment arrangement if that is the best option for you.

Alternatively, if you get up to date with your tax returns, you may find that you can reduce the amount that’s due. For example, if your business has ceased trading, you can offset the final loss.

This is a complex and often upsetting process to be involved with. Think about engaging an expert who can help you and your business recover from this setback and who has expertise in how the system works.