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Debt Man­age­ment used to fix direc­tors per­sonal debt issues

Fre­quently direc­tors of a small busi­ness bor­row in their own name to invest in the com­pany. If the busi­ness sub­se­quently fails, the direc­tor will be respon­si­ble for this debt. As a result, direc­tors of failed busi­nesses often find them­selves strug­gling with per­sonal debt which they can­not afford to repay. Busi­ness Recov­ery ser­vices such as a com­pany vol­un­tary arrange­ment or phoenix­ing can be used to try and save the busi­ness, but these do not resolve direc­tors per­sonal debt.

As I have dis­cussed in pre­vi­ous arti­cles, one solu­tion for a Direc­tor who is strug­gling with per­sonal debt could be an indi­vid­ual vol­un­tary arrange­ment (or IVA). How­ever, in order to make an IVA work, there needs to be either a sus­tain­able income from which monthly pay­ments can be made, or a lump sum avail­able which could be used to offer cred­i­tors a full and final set­tle­ment. With­out this, an insol­vency prac­ti­tioner who is required to imple­ment an IVA would be reluc­tant to put the arrange­ment in place which might then be at risk of failing.

A reg­u­lar income or lump sum of money is unlikely to be avail­able if the director’s com­pany has recently been closed. Given this sit­u­a­tion, the answer for many direc­tors is not IVA but to con­sider a debt man­age­ment plan. Debt man­age­ment can be a very use­ful way to man­age a per­sonal debt prob­lem par­tic­u­larly for a tem­po­rary period.

So what is a debt man­age­ment plan?

In sim­ple terms it is an agree­ment with cred­i­tors to reduce the monthly repay­ments that they receive. Impor­tantly, the pay­ments required to oper­ate a debt man­age­ment plan can be sig­nif­i­cantly lower than those required for an IVA. In addi­tion, even if the reduced pay­ments turn out not to be sus­tain­able, the plan can be re-negotiated. Were this to hap­pen in an IVA, the IVA could fail and the direc­tor may be forced into bankruptcy.

What are the advan­tages of a debt man­age­ment plan?

Prop­erty is not put at risk in a debt man­age­ment plan as long as you keep up with mort­gage pay­ment. The direc­tor is also free to take up other direc­tor­ships which might be an impor­tant part of the strat­egy for rebuild­ing income.

How­ever, there are of course down­sides to debt man­age­ment. Cred­i­tors do not agree to write off any of the debt owed. As such, if the reduced monthly pay­ments can­not be increased or a lump sum to set­tle the debt can­not be found, the time that it takes to repay the debts in full could be sub­stan­tially increased.

Debt man­age­ment is gen­er­ally seen as a tem­po­rary solu­tion to man­age a dif­fi­cult debt prob­lem until an indi­vid­ual is back on their feet. As such, this type of solu­tion could be per­fect for a direc­tor after a busi­ness fail­ure while they are look­ing for a new con­tract or start­ing a new busi­ness ven­ture which can­not afford to pay an ini­tial salary. How­ever, debt man­age­ment will not nec­es­sar­ily be suit­able for all sit­u­a­tions. As such it is impor­tant to get advice from a spe­cial­ist debt expert before using this kind of per­sonal finan­cial solution.