I have personal debt - What should I do?

Personal debt advice for company directors

Very often directors will support their company finances by providing personal guarantees on company borrowing or by borrowing money in their own name which is then injected into the business.

If the company finds itself in financial difficulty, directors who have borrowed on behalf of the business are left personally responsible for the debt.

This often leaves the director with a debt problem of their own.

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Options for dealing with personal debt

As a company director, there are various options available for dealing with personal debt. The right solution for you will depend on the nature of your personal circumstances.

Individual Voluntary Arrangement (IVA)

An IVA is an agreement with your creditors to settle debt over a fixed period of time (generally 5 years). You make a single monthly payment towards your debt based on what you can afford. At the end of the agreement any outstanding debt is written off. As such you could write off up to 70% of your debt using an IVA.

Once an IVA is in place, your creditors can no longer take action against you to collect the debt that is owed and all interest and charges must be frozen.

However, if you are a home owner, it is likely that you will have to release any available equity from your property to increase the amount paid back to your creditors.

Advantages of IVA

• Debt free after 5 years
• You can continue to act as a director throughout your IVA
• Up to 70% of your debt can be written off
• Creditors no longer able to take action against you
• Discreet procedure – the IVA is not publicly advertised although your name is added to the insolvency register which is accessible via the internet

Disadvantages of IVA

• An IVA can only be started if you are able to sustain the required monthly payments or can offer a lump sum in full and final settlement
• Undertaking an IVA will affect your credit rating
• If you are a home owner, you will have to agree to release available equity
• Once started, if your IVA fails through non payment, you could be declared bankrupt
• Your personal credit rating will be affected for 6 years from the date of your IVA

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Debt Management Plan (DMP)

A debt management plan is an informal gentleman’s agreement with your creditors to reduce the payments you make towards your debt each month to a more affordable level.

The DMP is much more flexible than an IVA in the sense that monthly payments can be reduced to a lower level and once in place, changes to monthly payments can be made relatively easily. Also you are not forced to release equity from your property.

However, creditors do not automatically agree to write off any debt in a DMP. 100% of the debt owed must be repaid and creditors can continue to add interest and charges. This means that it could take an extremely long time to repay your debt using a debt management plan.

Advantages of DMP

• Monthly payments reduced to an affordable amount
• Flexible solution – monthly payments can be easily increased or decreased
• No requirement to release equity from property
• Discreet procedure – name not added to the insolvency register
• Can be used to create a breathing space until times get better again

Disadvantages of DMP

• 100% of debt must be repaid which could take many years
• Creditors can continue to add interest and charges to accounts
• Unless payments can be increased, the repayment period could last for many years
• Your personal credit rating will be affected until your debts are repaid

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Bankruptcy

As a company director, bankruptcy should be seen as a last resort for dealing with a debt problem. If you declare bankruptcy you will not be allowed to continue in your position as a company director for the period of your bankruptcy.

As such, most directors would choose to avoid this procedure unless they had already decided to give up their business.

If you no longer wish to act as a director, Bankruptcy is an extremely effective way of dealing with a serious debt problem as all of your debts are taken away from you. However, if you have any equity in a property, there is a high risk that this would have to be sold.

Advantages of Bankruptcy

• Debt written off after 1 year
• If monthly payments required, these will generally only last for 3 years
• You can keep reasonable household assets

Disadvantages of Bankruptcy

• Not allowed to continue as a director while bankrupt
• Car worth more than £1500 may have to be sold for the benefit of creditors
• Your property could be sold to release any equity for your creditors
• Your personal credit rating will be affected for 6 years from the date of your bankruptcy

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