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Where a company has failed or gone bankrupt, the Directors may often be left with significant personal debts which they are struggling to repay. Where this is the case, could these problems be resolved by a debt management plan? Frequently directors of a small business borrow in their own name to invest in the company. This is fine until the business is struggling, but at that point they find they are personally responsible for debt that they cannot afford to pay. There are a number of business turnaround schemes such as pre-packing and voluntary arrangements available to try and rescue the business, but these do not resolve directors personal debt. I have previously discussed 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. Clearly, if a Director's business has recently closed, it is unlikely that they will have either a sustainable income or money for a lump sum. In this scenario an IVA is going to be a non starter. 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. If the director owns property, this is generally not put at risk in a debt management plan as long as the mortgage payments are maintained. 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.
Derek Cooper is Managing Director of Cooper Matthews Limited.
Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic climate.
Find out more about how this solution could help you at coopermatthews.com/debt-management.html
Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice providing practical insolvency advice for businesses and directors with financial problems to turn your situation around.
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