Debt Management used to fix directors personal debt issues

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.