Using Debt Management to resolve directors personal debt problems

If a company has failed (gone into liquidation), 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?

The directors of small businesses often build up personal debts because they have borrowed money in their own name to invest into the business. 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.

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.

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. 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.

A debt management plan is simply 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 - September 2009

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Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Business Refinancing and Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems and to Directors with Personal Financial troubles. They have significant experience in working with small to medium sized businesses.

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 http://coopermatthews.com/debt-management.html

For those who are not business owners or directors more information on debt management plan