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How does an IVA for a self-employed individual work?

The 1986 Insolvency Act, which introduced Individual Voluntary Arrangements (IVAs), was created with businesses in mind and, as such, an IVA is a notable solution for people who are self-employed. An IVA proposal can be drafted to enable ongoing business relationships, work around seasonal work, allow for the exclusion of business assets and provide for continuing business credit. If you are not self-employed and are from England, Wales or Northern Ireland read about IVAs here, or if you are from Scotland, read about Trust Deeds here.

An IVA for a self-employed person works in the same way as an IVA for an employed individual, and you should also read the general section about IVAs here. Interest and charges on unsecured debts are frozen, and an agreement is made with your creditors for you to make manageable monthly payments for a period of time towards those unsecured debts. At the end of the agreed payment term, provided you have adhered to the terms and conditions you agreed to, the unsecured debts included in the IVA are written off. An Insolvency Practitioner (IP) works with you to establish the amount that you could realistically pay and this amount is distributed to your creditors on your behalf, after the deduction of the agreed IVA costs. Once the IVA has been entered into, creditor pressure will reduce and eventually cease. An IVA could enable you to be debt free in just 5 years, allowing you to stabilise your business and focus on maintaining your revenues and profitability.

Once an IVA has been approved by your unsecured creditors, you pay your monthly payment to your IP, and submit documentation once a year for an annual review. You are required by law to keep your IP up-to-date with your financial circumstances as they may be able to lower, as well as increase, your monthly payments.

If you are a homeowner there are specific provisions that will be included into your IVA proposal to deal with any equity in your property.  These provisions apply to self-employed and employed individuals alike and can be found here.

Eligibility

To qualify for an IVA, you need:

  • A minimum of £5,000 of qualifying unsecured debt
  • Debt from two or more creditors
  • Be resident in England, Wales or Northern Ireland

 

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Differences from an employed individual’s IVA

The process of preparing an IVA for a self-employed individual differs very little from an IVA for a person who is employed. Your Insolvency Practitioner will put together an agreement of affordable monthly payments based on your income and expenditure, and send it to your creditors to either approve or reject. However, there are some key attributes of a Self-Employed IVA which can help you.

Seasonal Income

Self-Employed IVAs are generally written to be more flexible. This is particularly helpful when it comes to businesses with more seasonal income, for example landscape gardeners or builders. A cashflow statement will need to be prepared, to enable the Insolvency Practitioner to understand how much you can contribute in different months, and the offer of payment you can realistically afford.

Business Credit

for an employed person in an IVA, it is necessary to obtain permission from the Insolvency Practitioner where credit of more than £500 is required during the IVA term. Where a self-employed individual requires the ongoing use of business credit facilities to viably run the business, this can be discussed and pre-agreed with the creditors within the IVA proposal. This will be subject to agreed criteria and parameters. Creditors will normally allow business credit, provided that it is repaid the sooner of 30 days or the invoice terms.

 

Excluding trade Creditors from the IVA to enable future trading

A self-employed individual may require the ongoing supply of goods or services from an unsecured creditor, and including this creditor in the IVA may severely impact the ongoing business relationship. Under these circumstances, it is possible to propose that certain trade creditors are excluded from the IVA, and will receive ongoing payments towards their debts. This should be carefully considered, as any excluded creditors are able to take legal action against you, and continue to add interest to their debt.

To read more about how an IVA operates for an employed individual, click here.

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Benefits of an IVA for a self-employed individual

  • You will continue to have full control over your trading
  • Your business can continue to trade
  • You will be permitted to keep your business assets, as well as your personal assets. A creditor could ask you to sell a non-essential asset or replace a valuable asset with a cheaper replacement and put the profit into your IVA, but your ability to work should not be drastically impacted
  • Unsecured creditors included in the IVA cannot take legal action against you

 

Disadvantages of an IVA for a self-employed individual

  • Although business credit can be proposed, creditors may refuse this
  • If your business bank account operates with an overdraft, or is with a bank where you have unsecured debts, you will need to change your bank account
  • Although you make an offer to make affordable repayments, where the business makes profits over and above those anticipated, you will be expected to increase the payments into your IVA accordingly
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Get IVA Help and Advice

 

It is important to remember to check your existing business contracts, and your lease, if you are working in a leased premises. Some contracts have clauses which prevent you from entering into a Self Employed IVA.

For more information on IVAs, click here.

You can also call us for free advice on a number of debt solutions, including IVAs and Trust Deeds, on: 0808 253 3433 or text ‘ADVICE’ to 60060

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