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Repaying Personal Debt Incurred Through Your Business

If you own a business then at one time or another you will likely find yourself taking personal debt on its behalf.  This may be necessary to help maintain the cash flow needed for your business to continue, and often occurs when customers or clients fail to make prompt payment, and the business meantime runs short of cash to enable it to pay its own bills.

By no means is such a company insolvent, and the cash borrowed is only a temporary expediency, but sometimes it's just too easy to maintain the minimum payments and so retain as much cash as possible in the business.  This is just one way in which you, as a private business owner, can find yourself in personal debt through your business - but there are other ways.

Some banks offering business loans are now requiring small business directors to give a guarantee that they will personally underwrite the loan repayments, and personally make payments if the business has insufficient cash flow to do so. Most people agree to this because they expect their business to be successful - but what if it isn't?  The recent recession resulted in thousands of small (and large) limited companies closing down each month, and many directors of these had such agreements with their banks.

Maybe you are a sole trader, a term that has nothing to do with the stock exchange.  A self-employed plumber is a sole trader, and your debts will be in your name.  During the good times business is brisk, and your repayments are made through the business. But in bad times you are personally responsible for them unless your business is registered as a limited liability company.

There are other ways in which you can incur personal debt while running your business. You cannot be liquidated or come to a CVA, so what can you do if you personally find yourself with this form of personal debt? In fact, just as there are alternative solutions for businesses, for businesses, there are similar solutions for individuals. The first of these is the Consolidation Loan:

Consolidation Loans

Consolidation loans are very common, and are a means of taking one large loan that is used to pay off a number of smaller debts. The consolidation loan can be secured or unsecured, although a secured loan is generally better if you can afford to pay because you will usually be paying a lower interest because the loan is secured on your home or your business.

Because you will be paying off debts in full, you might want to come to an arrangement to pay less than the total owed.  Many creditors will accept this if they feel they are not likely to be paid more. You are advised to seek professional help with this, because a professional can generally get you more favourable terms than you can yourself. On the whole, you will be less each month that had you kept paying each debt individually.

Debt Management Plan

A debt management plan is suitable for individuals with a number of creditors. The plan involves a breakdown of your income and expenditure, and then a calculation of what you can reasonably be expected to pay each month.  This is then distributed amongst creditors pro rata on what they are owed.

This is not a personal debt solution for sole traders owning their own businesses who have tax problems with HM Revenue and Customs, because they will not accept it. However, where you are a director wanting to keep your debts private or an individual with debts but not owing taxes, such a solution can be arranged between you and your creditors.

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IVA (individual Voluntary Arrangement)

This is the individual's equivalent of the CVA (Company Voluntary Arrangement), and is a solution only for individuals, not for PLCs or limited liability companies that should consider a CVA.  Unlike the above arrangements, an IVA is legally binding, and enables you to pay in monthly payments over 5 years, or in one lump sum that is lower than the amount you owe.

Once your creditors agree with this, they stop interest and late payment charges for the duration of the agreement. The reason that the IVA was introduced into the 1986 Insolvency Act by the government was specifically to help those who had taken on personal debt when promoting their own businesses. It was to enable them to continue running the business while paying off the debt. The IVA is normally permitted for loans over £18,000.  Less than that should be handled by a debt management plan.

Bankruptcy

This is the final solution in the hierarchy of personal debt solutions. Bankruptcy involves individuals, not businesses, and is the final action in dealing with personal debt when there appears no possibility of the debt being repaid. An application for bankruptcy can be made in Court, and if granted all of your debts are removed.

However, your assets can be sold to pay creditors, so this is not always a good solution if you have equity on your home - that too can be sold by order of the Court, although you are permitted to retain essential household items such as a cooker and a bed. A car valued at greater than £1500 will also be sold.

Bankruptcy last 12 months, during which time you may not take on further credit or act as a company director.  Bankruptcy is not usually a good solution because of what you lose, but if you feel that your business is about to become successful then bankruptcy might be worth considering.

The consequences of excessive personal debt can be severe, but there are ways to ameliorate its effects such as some of those described above.  It is very important, however, that you get professional help because it is highly unlikely that you will be able to personally negotiate the best arrangement for your situation.


 

 

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