While it is safe to say that self-employment does have its benefits, a greater degree of flexibility being one of them, there are many drawbacks and challenges. In times of economic hardship there is often no pool of funds to fall back on, no protection of income and when income is disrupted debts can very quickly accumulate. Therefore, a self-employed IVA (Individual Voluntary Arrangement) is for many a real option in times of financial hardship although this only relates to unsecured debts.
What is a self-employed IVA?
The best way to describe a self-employed IVA is a legally binding agreement between you and your creditors. The agreement will contain an arrangement to repay a predetermined figure each month towards all outstanding debts. A basic self-employed IVA will last for five years although on some occasions this can be extended to 6 years. As long as you stick to the repayment schedule then after the self-employed IVA term has concluded all outstanding debts will be written off.
A self-employed IVA is often talked about in the same breath as bankruptcy but there are benefits from a self-employed IVA for all parties. The set-up of a self-employed IVA allows the individual to remain trading, therefore, bringing in funds to cover living expenses and partial repayment against debts owed. There will, of course, be situations where bankruptcy is perhaps the only option if trading has deteriorated to a level where income is negligible and debts are simply unmanageable.
Applying for a self-employed IVA
Any type of IVA will require the services of an insolvency practitioner who will in this situation review an individual’s finances to see if a self-employed IVA is applicable. If there is scope to continue trading and at least pay back some of the accumulated debt then the next step is to create a 12 month cash flow forecast for the business. This stage of the process will focus on business income and business expenditure to show that it is viable to continue.
The next step is to consider current monthly living expenses and investigate areas where savings can be made. As long as there is surplus capital available after withdrawing personal monthly income from the business (including taxation) then there is every chance of moving forward with a self-employed IVA. It is worth noting that the income for many self-employed individuals can be susceptible to seasonal trends which need to be taken into account. There will also be situations where income is difficult to forecast with perhaps large lump sum payments at the end of individual projects. These are all factors which need to be considered by the insolvency practitioner in charge of managing self-employed IVAs.
If a self-employed IVA is the best solution for the debts of an individual then the next step is to contact all creditors with a report highlighting business income/expenditure together with personal living expenses and any surplus. If the report is realistic and at least a portion of the debts can be repaid then many creditors will look favourably upon the proposition. It is worth noting that at least 75% of creditors by overall debt must vote in favour for it to proceed.
Unlike bankruptcy, with a self-employed IVA the individual will be able to retain not only personal assets but also business assets up to a certain level. The reasoning behind this is simple, if all of the assets used with the individual’s business were sold to repay part of outstanding debts, where would their future income come from?
Therefore, within reason, the majority of self-employed IVAs will see the individual retaining a significant level of their assets. There will be scenarios where this can differ such as:-
- Where homeowners have significant equity in their property
- When a luxury vehicle/business asset could be exchanged for a more modest one
There is no one size fits all scenario for individual self-employed IVAs as business and personal situations tend to be very different. However, there is no long-term benefit in restricting the trading of a self-employed individual. This would limit their income (as well as ability to make repayments) and could impact the employment of others.
Managing a self-employed IVA
It is the role of an insolvency practitioner to manage a self-employed IVA which will mean collecting monthly repayments and distributing to creditors. A portion of the monthly repayment will also be allocated to the insolvency practitioner to cover their ongoing management fees. There will also be an annual review of the situation to ensure that there have been no material changes in income or expenditure which would impact the ability to cover monthly repayments.
In certain circumstances, where surplus capital has increased or decreased, the insolvency practitioner may recommend that creditors agree to a change in the repayment amount. It is not uncommon to see income increase within the five-year IVA term as a consequence of more visibility with regards to debt repayments. This often leaves more time for individuals to focus on growing their business. Alternatively, there may be occasions where trading difficulties see a significant reduction in annual income and they can only afford a reduced level of monthly repayments (or in some cases none at all).
In simple terms, those who work for themselves selling goods or services are classed as self-employed. This can take in any business sector from online content writing to childcare, retail to gardening, private landlords to freelance designers and more. Self-employed IVAs are not available in Scotland but they are certainly an option for those struggling to repay/manage their debts in England, Wales and Northern Ireland.
Working with an insolvency practitioner the first task is to gather all of the relevant information regarding debts, expenditure and income. This allows the creation of a strict budget regime going forward which would incorporate monthly repayments to creditors. As these are legally binding arrangements it is imperative that funds are repaid within the agreed timescale. While it can be stressful awaiting the outcome of a creditor’s vote, with a minimum 75% by value required to agree, the reality is that creditors would prefer some level of repayment rather than zero if additional debt management options were pursued.