When it comes to managing your debt, are there different rules if you’re self-employed? And if you do choose the IVA route, how might it affect your business?
More people than ever work for themselves. Around 15% of the UK workforce is now classified as self-employed, compared with 12% in 2001, yet for years the self-employed have faced higher debts than the employed.
Back in 2013 The Guardian reported on how the self-employed were “struggling with debts vastly beyond their earnings.” Citizens Advice claimed the self-employed were as likely to be in debt as the unemployed. It seems little has changed, with the Money Advice Trust reporting in late 2018 that 61% had used personal credit to cover business debt, and that 23% owed more than £30,000.
Why do self-employed people face greater debt?
Generally speaking, if you’re employed you don’t have to worry about being paid on time and your wage is likely to be much the same from month to month. In contrast, many self-employed workers face a constant battle to get paid on time (or at all) with 41% of UK freelancers consistently paid late. Earnings are irregular and as new regulations bite – such as the recent changes to rules affecting subcontractors – many self-employed people are finding the work they did have is suddenly evaporating, leaving them with even greater debt issues.
But if the chances of falling into unmanageable debt are greater if you are self-employed, at least there are routes out of it.
Can I get an IVA if I’m self-employed?
Yes, usually. If there’s going to be an issue, it’s likely to come with the requirement to keep making regular payments towards your IVA. For the IVA to be approved your insolvency practitioner will need to be assured that you can keep making payments. That could be difficult to prove if:
- Your income fluctuates greatly
- You’ve only recently set up in business and have no accounts to show a track record of income
If you can, try to build up that track record before you apply for the IVA. A full year of accounts would be ideal but 6 months may be enough to convince your practitioner. In the meantime, consider a debt management plan to help you in the short term.
What debts will my IVA cover?
You’ll be able to include debts connected to your business as well as personal debts. Tax, VAT and NI arrears can all be included, together with bank overdrafts, credit card loans, car loans and other unsecured loans.
I rent an office. How will my IVA affect that?
If you rent an office, workshop or any other premises, you’ll need to check that there’s no clause in the lease agreement regarding IVAs. If there is, you may be required to forfeit the lease. Even if there is such a clause, however, it’s worth speaking with your landlord because whilst they may retain the right to terminate the lease, that doesn’t necessarily mean they will. Naturally, if you can avoid falling behind on the rent it will help your case.
Your rent will usually be an allowable expense in the budget you agree with the insolvency practitioner, so as long as your lease allows your IVA, you should be able to stay.
How will my assets be affected?
Your creditors stand a much greater chance of getting a proportion of their money back if you are able to keep earning. For that reason, you’ll usually be allowed to keep assets you need to operate your business. If you operate a workshop, for example, you’ll usually be able to keep your tools and equipment. And if you need to travel for your work, you’ll be allowed to keep a vehicle too – although you may be required to downgrade if your current vehicle offers a level of luxury that’s not essential for you to carry out your work.
If you work from home you wouldn’t typically be required to sell it, although it’s very rare to lose your home with an IVA even if you don’t use it as your workplace.
If you have more than £5,000 worth of equity in your home, however, you may be asked to either release a proportion of the equity in your home or pay for a further 12 months, extending your IVA from five years to six.
Can I start a business whilst I have an IVA?
Yes. There’s nothing to stop you launching a new business whilst you’re under an IVA – which is a major difference from bankruptcy. Be aware, though, that if you need credit to get your business idea off the ground you’ll need your insolvency practitioner’s authority to apply for anything over £500.
In addition, your damaged credit rating may make it much harder to find affordable credit.
Should I keep my existing bank account?
If you’re significantly overdrawn, you may be better off opening a new business bank account and including the overdraft (and any other outstanding bank charges) in your IVA.
That’s because banks operate a ‘right to offset’ which means they can use money in one account you hold with them to pay off debts in another. As you’ll want to keep tight control of all the money you have coming in and out, it will often be better to switch.
Can I get an IVA if I run a business in Scotland?
No, but you can apply for a Scottish trust deed (also known as a protected trust deed) which operates in a similar way. Find out more about self-employment and trust deeds here.
Are IVA’s a government backed scheme?
IVA’s were introduced in 1986 and form part of the Insolvency Act (1986) to help people who are struggling to pay their debts. Unlike debt management, they are a legislated and formal debt solution meaning that the IVA agreement is legally binding, which can help to eliminate harassment from creditors.
Will I lose my home in an IVA?
Unlike bankruptcy, you wouldn’t usually lose your home in an IVA. If you own your home and have equity you may be required to release it so the IVA company can pay your creditors (that is, the people and organisations to whom you owe money). Read more here.
Will an IVA affect my credit rating?
Your credit rating will be affected whilst on an IVA and will stay on your credit file for up to 6 years. Any debt solution will affect your credit rating, but at the same time if you’ve missed payments and defaulted then your credit file will be affected anyway, as a default also stays on your file for up to 6 years. Read more here.
Do I need to know who I owe before I apply for an IVA?
It’s not a problem if you cannot remember all the people you owe money to before you apply for an IVA. A lot of people forget as they may have been taken out a long time ago. We have systems which can find all your debtors.
How much debt can I write off with an IVA?
The amount of debt that can be written off with an IVA very much depends on personal circumstances, such as your current employment status, debt level and disposable income. The maximum is 90% of unsecured debt but the average is around 60%.
How can I apply for an IVA?
There are 4 ways to apply for an IVA. 1: Call us on 0800 193 1024. 2: Apply online here. 3: Chat with us on live chat. 4: Apply through our Facebook page. The IVA application process is very simple and can be setup in as little as 24 hours. The speed usually depends on how quickly you can get information to us.
I’m thinking about an IVA. But what happens if I have no money spare at the end of the month?
It’s still worth exploring options with a debt management professional. They may be able to help you make your budget stretch further. If not, they will be able to give you advice about which is the right debt solution tool for you. That could be an IVA (in England, Wales or NI) or a protected trust deed (in Scotland) but there are several other potential options.
What happens if my circumstances change?
Talk to your IVA insolvency practitioner. They may be able to get agreement from creditors to a temporary reduction in payments or a longer repayment period to help you over a difficult period.
Why is my bank taking money from my account to pay my debts?
Banks hold an automatic ‘right to offset’. This means that if you have money in a bank account and unpaid loans or credit cards with the same lender, they can take the money in the account to pay off the debts. More confusingly, this can also happen when the debt is owed to a company also owned by your bank.
So, for example, if your bank account is with HSBC and you have an unpaid credit card with M&S Bank or First Direct, a right to offset could be used to pay those debts, because HSBC owns all of them.
You can find more about which banks are subsidiaries of other banks here.
In an IVA, and to avoid the right to offset, you may be required to switch bank accounts.
Will an IVA affect my credit rating?
Yes. The record of the IVA will remain on your credit file for six years from the date the IVA begins.
Will I still be able to get credit with an IVA?
Getting credit is harder with an IVA. If you want more than £500 of credit you’ll need permission from your insolvency practitioner in most circumstances. The chances of credit being approved are less, and any credit you are able to secure is likely to cost more.
Bear in mind, however, that an IVA (and a Scottish trust deed) is designed to help you escape debt, not find new sources of it.
If I choose an IVA, do I have to deal with my creditors directly?
No. In fact, you can’t set up an IVA without an insolvency practitioner who will handle all the to-ing and fro-ing between creditors. Assuming you qualify in other ways (see above) that makes an IVA ideal if you’d rather not speak to your creditors.
Then, to find out whether a protected trust deed could be the right route out of debt for you, talk to us.
- Apply For An IVA
- Is An IVA Worth It?
- Are IVAs a Government Scheme?
- What If I Can’t Pay My IVA?
- Can I Get An IVA If I’m Self Employed?
- Rebuilding My Credit Rating After An IVA
- IVAs: What Will I Need To Show My Insolvency Practitioner?
- Who’s Most Likely to Need an IVA?
- How Much Does An IVA Cost?
- Can I Afford An IVA?
- IVAs – Can I Lose My Home?
- IVA And Trust Deeds | Whats The Difference?
- How Will My IVA Affect My Parents?
- An IVA Mythbuster
- Can An IVA Be Rejected?
Trust Deed Example
Example Unsecured Debts
|2||Credit card 1||£6,812|
Your Monthly Repayments Would Be
a Scottish Trust Deed £748
(total contractual repayments)
a Scottish Trust Deed £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here