When IVAs were first introduced, they were designed with business owners and company directors in mind.
The 1986 Insolvency Act originally introduced them as a way for businesses to deal with their unsecured debts.
This benefitted both businesses and creditors as it meant that companies could avoid bankruptcy whilst lenders made back more of their money.
IVAs can still be used by business owners today but because they are a form of legal insolvency, people often wonder what the implications of an IVA are for existing or new businesses.
We answer this and more below.
Can I enter an IVA if I’m self-employed?
It is entirely possible to enter into an Individual Voluntary Arrangement or Individual Voluntary Agreement (IVA) if you are self-employed, but there are some key differences to bear in mind.
For example, if you are self-employed, your monthly income is likely to be slightly more irregular than someone who works for a company.
Because of this, what you pay towards your IVA can be more flexible and you may need to prepare a cash-flow statement for your Insolvency Practitioner (IP) to show how much your income fluctuates from month to month.
Self-employed IVAs are designed to take these fluctuations into account, and you might end up increasing or reducing your payments over the course of the IVA as your income varies.
This is totally acceptable as long as you keep in touch with your IP to advise them of any changes in your circumstances so your payments can be adjusted.
Why choose Creditfix?
What is a Company Voluntary Arrangement?
A Company Voluntary Arrangement (CVA) is an insolvency solution that allows businesses to repay their company debts over a set period. It allows business owners to retain control of their assets as opposed to selling them to repay the debt.
During a CVA, your business can continue to trade as normal and will be protected from creditors taking legal action against it.
Generally, most creditors prefer when businesses choose a CVA over bankruptcy as it means that they’ll likely receive more of what they are owed.
Like a personal IVA, the creditors representing 75% of the total debt must be in favour of the proposal.
Once this has been achieved, all creditors are legally bound to the arrangement – even those who didn’t vote or voted against it.
Can I get business credit if I’m in an IVA?
Understandably, being in an IVA reduces your access to credit. However, when someone who is self-employed enters into an IVA, things can be slightly more flexible.
Firstly, you will still need your IP’s permission to obtain more than £500 of credit, but you may be able to exclude one line of business credit from your IVA and repay them separately in order to continue your working relationship.
This can be negotiated in your initial proposal to your creditors but should be agreed before the IVA commences.
Creditors aren’t likely to reject without reasonable cause, but you must keep up repayments for business credit in good time to avoid further financial issues.
Remember, even if you manage to find a lender willing to give you credit, you could be charged more interest and may have to offer a personal guarantee to cover the extra risk to the lender. Personal guarantees are a type of legally binding agreement stating that you’re aware that you are personally responsible for the debt if something were to go wrong down the line.
How are business bank accounts affected by an IVA?
If your business account is overdrawn and you need a line of credit to cope with the running costs of your company, you may be able to keep the account.
However, if it is overdrawn by a large amount, it might be more sensible to include it in your IVA agreement instead.
Additionally, if you hold other lines of credit with the same bank, such as a business loan, the bank may exercise the ‘right to offset’.
This means they could seize money paid into your business account to offset your other debts. If this is a risk, opening a new business account and including the old one in your IVA is usually the best option.
"Professional staff - they were understanding and non-judgmental. Fantastic, quick service too. Would recommend to anyone!" Michael, SunderlandHow we helped Michael
Can you get an IVA with a limited company?
IVAs are available regardless of whether you are a sole trader or own a limited company. It’s also possible to register your business as a limited company whilst you are in an IVA.
This is because, unlike bankruptcy, you are completely free to be the director or shareholder of a company whilst using an IVA to deal with your personal debt problems so making the decision to go limited will not be affected by your arrangement.
However, if you’re a salaried director, you may have to produce records to prove that it’s enough to support your personal income during your IVA.
It’s also important to carefully consider any changes to your employment during an IVA as you will need to continue making your agreed-upon payments in order to successfully complete it.
As mentioned earlier, some flexibility is allowed, but if you’re unable to make your original payments for an extended period, your creditors will have to agree to the lower amount, which they might not be willing to do. This could put your IVA at risk of failing, which can sometimes lead to bankruptcy.
Can I start a new business with an IVA?
There is nothing stopping someone who is in an IVA from establishing a new business. However, like all financial decisions, this should be carefully considered.
Starting a new business can be the right decision in the long term, but it may be advisable to wait until you have completed your IVA or even until you have rebuilt your credit score before making any serious financial decisions.
This is because you may struggle to obtain credit and a business bank account during or immediately after an IVA.
When potential banks and other lenders see you have entered into an IVA, they will know that you have had trouble repaying credit in the past and be more cautious about lending to you.
Remember, you must inform your IP of any potential changes to your employment status as soon as possible.
Could my job stop me from entering into an IVA?
While rare, some jobs include a provision in their terms that states that entering into an IVA would be grounds for dismissal. Therefore, it’s unlikely that a director working for such a company would be able to keep their job after they entered into an IVA.
However, this is usually only the case for certain sectors, such as legal services, accountancy, and banking, and it isn’t necessarily the case for all jobs within these sectors (e.g. those where you’re not directly involved in handling other people’s finances).
The easiest way to check if your job could be affected by an IVA is to check the terms and conditions of your employment contract, arrange a confidential meeting with your HR department, or talk to a trade union or professional body.
How are my assets dealt with in a self-employed IVA?
One key advantage IVAs have over bankruptcy is that you will be able to retain your assets – including your property if you are a homeowner. With a self-employed IVA, you can still keep all of your assets in the vast majority of cases, but there are a few exceptions you should consider.
IVAs were originally designed with business owners in mind, so it makes sense that this solution for repaying your debts disrupts trading far less than bankruptcy would.
Nonetheless, there are instances where a few assets might need to be sold.
We’ve outlined how your assets are dealt with in a self-employed IVA below:
Business-related assets
Your creditors are likely to make a far better return on what they lent you if your business continues to operate. For this to happen, of course, you will need to retain the tools, equipment, vehicles, or technology associated with the business, and will not be required to relinquish any of these assets.
In a few cases, you may be asked to replace very valuable work-related assets with less expensive ones and pay the difference towards your IVA.
For example, if your business requires you to travel, and you currently own a valuable luxury car, you might be asked to replace it with a practical, inexpensive alternative.
However, even if you are asked to replace a business-related asset, you will never be asked to forego something that is necessary for your business to function.
Personal assets
As mentioned earlier, IVAs protect your assets. In some rare cases, you might be asked to sell a highly valuable vehicle. However, if you can prove that the vehicle is necessary for your work, which it is likely to be if you are self-employed, you will be able to keep it, or at least a cheaper model.
If you own a low-value vehicle, you will probably not be asked to sell it even if it is not deemed necessary to your work, since your creditors would be unlikely to really benefit from its sale by the time administrative costs were covered.
Your home
Unlike bankruptcy, having an IVA does not put your home at risk. However, if you have enough equity in it, you may be asked to release some during the final year of your IVA by remortgaging. Exactly what happens will depend on how much equity you have in your property:
- If you have £5,000 or less worth of equity
If you have little or no equity in your home (£5,000 or less) you will not be asked to release it for your IVA.
Instead, you can either make an extra year’s worth of monthly IVA payments or a third party can make a lump-sum payment in place of home equity, agreed upon by your creditors.
Similarly, if you do not own a home, you will also need to make either an extra twelve payments or have a third party offer a lump sum to make for the extra money owed.
- If you have more than £5,000 of equity
If you have significant equity in your home (more than £5,000) you will be asked to release some in order to complete your IVA.
You will not be asked to release all of your equity, however, but up to 85%.
In some cases, it is impossible to release equity because mortgage providers refuse to remortgage a property. If this happens, you must instead agree to make an additional 12 months of payments or have a third party make a lump sum payment towards your IVA on your behalf.
Get debt help todayWhere can I get more advice about being a company director with an IVA or any other debt solutions?
If you’re a company director and are looking to enter an IVA to deal with your financial difficulties or vice versa, it’s important you seek free advice as soon as possible.
There are varying rules depending on what kind of company you own and what stage of the IVA process you’re at.
The way your assets are dealt with can also differ depending on your financial position, whether you’re a homeowner, and how much equity you have in your home.
When you contact one of our expert advisors, they’ll review your income and expenses and determine whether an IVA is the right choice for you – whether you’re self-employed or own a limited company.
