If you are self employed and have debt that you are struggling to repay, an IVA could be the solution. We consider when an IVA might be suitable and what to look out for.
An individual voluntary arrangement (IVA) is a formal legally binding agreement with your creditors to settle debts that you cannot afford to repay.
Once in place the agreement allows you to repay as much as you can over a five year period. At the end of this time any outstanding debt is written off although if you are a home owner you may have to release any available equity to reduce your creditor’s losses.
The IVA is in fact an ideal solution for people who are self employed. You can continue to trade with an IVA and the agreement can include not only bank creditors but also trade creditors such as suppliers and VAT or tax debts owed to HM Revenue and Customs.
Sustainable income
However, as a self employed person, before you decide to go down the IVA route the most important thing to consider is whether your income is sustainable.
Generally your IVA will require you to make monthly payments towards your debts for five years. These payments will be at a greatly reduced rate to what you should be paying, however, you will still need to prove that you can afford to pay them.
You will be asked to present your accounts for the past one or two years if they are available.
More importantly you will be need to present a trading projection showing that the business is viable and can generate enough cash to cover the running costs and the sufficient drawings after tax for you to sustain your living expenses and monthly IVA payment.
Trading projections will normally be required for between 12 and 24 months. Of course no one can truly predict the future. However, the projections do serve as a good indicator of what income can be expected from the business.
My business is new or unstable
If your business is currently unstable and you are unable to show profitable projected trading in the short term, this may prevent you from doing an individual voluntary arrangement.
You will not be allowed to start the agreement unless you are confident of being able to make the agreed payments. The reason for this is that if your IVA fails, you may well be left with debts outstanding and if you are a homeowner, there is a risk that you will be declared bankrupt.
If you have only just started your business, you may have to wait to carry out an IVA until you have proven that you projected income is realistic.
Generally speaking, if you have only recently started your business, your best option is to carry out a debt management plan (DMP) for six months or so ( http://www.beatmydebt.com/debtmanagement/index.htm ). This will enable you to prove that the income you can generate from the business is as expected and sustainable.
Where suitable, an individual voluntary arrangement is an extremely good way of dealing with a difficult debt problem. The agreement is ideally suited if you are self employed as all of your business and tax debts can be included.
However, you must be sure that you can sustain the required payments and be prepared to back this up with sensible trading projections.