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. When the business starts to struggle however, you may no longer be able to draw enough funds 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:

1. Consolidation
   
   If the debts are not too large and you are still able to draw some funds from your business, you may be able to consider consolidating with a single loan. The single monthly payment of the consolidation loan is normally lower than the total amount of all the individual loans. This lower payment may be affordable with your reduced budget.
   
   
   If your debts are more than GBP15,000 - GBP20,000 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.
   



2. Debt Management Plan
   
   This option can work well if the majority of your creditors are banks. It involves reaching an informal agreement with all of your creditors to reduce the repayments they receive each month to fit into the budget you can afford. 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.
   



3. 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. The creditors agree to write off your debts after 5 years 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.
   



4. 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.
   

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

More information about solving personal debt caused by business difficulties and how to contact us are on our website at coopermatthews.com/personal-debt.html

Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing individuals running businesses in today's economic environment.

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