Self employed and in financial difficulty - 4 options to solve your debt problems

During difficult economic conditions, many sole traders and the self employed prop up their business with personal borrowing. If things go wrong, the individual is left with large personal debt which they cannot repay. What options are there available to resolve these problems?

If you are a sole trader and you borrow money to support your business, you will remain personally liable for the debt. When things go well, this is no problem as the business will be able to fund you so that you can make the necessary payments. However, if the business starts to struggle, you may no longer be able to draw enough to support your debt.

When you are unable to repay the debt which you borrowed to support your business, the solutions available to resolve this situation are very similar to those used to resolve any personal debt problem. There are four main solutions to consider:

Consolidation
If you are still able to draw some funds from your business and your debts are not too large, you may be able to consider consolidating with a single loan. The advantage of consolidation is that the single monthly payment you make will generally be lower than the total of the amounts you pay on all of the current debts. This lower payment may be affordable with your reduced budget.
If your debts are more than £15,000 - £20,000 you may struggle to find a bank willing to lend a loan large enough pay off all of your old debts and in these circumstances, consolidation may not be appropriate.
Debt Management Plan
A debt management plan is an informal agreement with all of your creditors to reduce the repayments they receive each month to fit into the budget you can afford. The solution can work well if the majority of your creditors are banks. However if you also owe money to suppliers and the inland revenue, these creditors are often not so willing to agree reduced payment plans and can be very difficult to deal with.
Individual Voluntary Arrangement
Where you can afford to pay something towards your debts each month, an individual voluntary arrangement (IVA) may be a very good solution. The original idea behind the IVA was to help business people who were struggling with debts. The IVA will reduce the monthly debt repayments you make to fit to a manageable budget. After 5 years of payments, the creditors agree to write off outstanding debt and you are left to continue with your business debt free. Creditors such as the Inland Revenue and trade suppliers can be included in an IVA. This is a very common solution used by sole traders.
Bankruptcy
If you find yourself in a position where you do not have enough income from your business even to make reduced payments each month, the most appropriate option may be to declare bankruptcy. You will not be required to pay towards your debt unless you can afford to do so. Many people are concerned that if they are homeowners and declare bankruptcy, they will lose their property. However, if there is little or no equity in the home, there is every likelihood that it can be saved. Most importantly, if you declare bankruptcy, as a sole trader, you can continue to run your business. As such you have the opportunity to continue to earn a living without the burden of paying your debts.

As a sole trader in difficult economic conditions, you need to be 100% focused on generating additional business. Where you have the additional worry of a debt problem, you will not be able to give your business the focus it requires. A debt problem will generally not go away by itself and therefore the best course of action is to deal with the debts head on.

Derek Cooper - October 2009

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.

Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specializing in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership. 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 environment.

More information about solving personal debt caused by business difficulties on our website at http://coopermatthews.com/personal-debt.html

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