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Using a lump sum Individual Voluntary Arrangement (IVA) to solve Self Employed and Sole Trader debt problems.

For a Director, Sole Trader or someone who is self employed, if your business has failed, you may not be in a position to maintain monthly payments into an IVA. However, this does not mean that you will not be able to use an IVA as a solution to your personal debt problem.

An Individual Voluntary Arrangement (IVA) is a formal debt solution which enables debts to be settled through monthly payments of your agreed disposable income, usually over sixty months, and the remaining debt being wiped clear at the end of that time.

There is an alternative to the standard monthly payment Individual Voluntary Arrangement, often called a lump sum IVA, but more accurately a full and final settlement IVA. This is more suitable if you are not in a position to maintain monthly payments due to financial troubles with your business.

A full and final settlement IVA is based on making an upfront lump sum payment to creditors instead of monthly payments over sixty months. If a lump sum can be raised, possibly through personal reserves, home equity release or with the help of friends and family, then this can be used so settle the debt in a single payment. The creditors accept the lump sum as full and final settlement of the IVA and the arrangement is completed or satisfied immediately on receipt of the lump sum.

How much does a lump sum need to be?

Each case is decided on its own merits and for this reason there is no magic formula that can be used for this calculation. Generally creditors will accept a lump sum which is slightly less than the value of the usual 60 monthly payments. This is because it is received up front therefore cutting out the risk of the debtor defaulting on their agreed payments.

Why would creditors not want monthly payments as well as the lump sum?

Generally any available disposable income will be required to pay back the person who made the lump sum possible, or to fund the mortgage repayments if it was generated through equity release. Hence no disposable income is available to provide this.

Once creditors have agreed to accept a full and final settlement of an IVA, you will normally have 3-6 months to produce the agreed lump sum. During this time none of your creditors can reappear and demand further payments. However, if the lump sum is not produced within the agreed timescales, the IVA is likely to fail at this point probably leaving you worse off than before.

If a lump sum can be made available, it can be seen that this form of IVA settlement has significant advantages for both creditors and debtors. Therefore a lump sum settlement IVA is often seen as an ideal personal debt solution, particularly for those whose business troubles leave no certainty of regular income.

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

Cooper Matthews specialise in Business Recovery Services Advice offering Practical Business Insolvency Advice as well as information and solutions to help Directors, Sole Traders and the Self Employed resolve personal debt problems.

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

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.

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