A basic principle of a limited company is that the Directors are not responsible for the company debts. However, in small to medium-sized companies it may not be that easy to keep your business debt and personal debt liability separate. Your debt liability can affect your company’s credit health as well, especially if you are planning to pay off your debt via formal debt solutions i.e. personal bankruptcy.
Here, we are going to assist all the small to midsize businesses in understanding the debt management for company directors and its various aspects in detail.
Debt management for company directors
As a company director, you give personal financial support to the business, especially at the time you are planning to expand your business. This may be in the form of guarantees for a company overdraft (For over 2000.00 Overdraft, personal guarantees may be required by a business bank) or a bank loan. The Company directors often get lending in their name and use the funds to pay company bills. The company directors are personally liable for these debts. (Debt management for company directors)
What is a Personal Guarantee?
A personal guarantee is an individual’s legally binding promise to repay money issued to a business for which they serve as a shareholder or partner.
Providing a personal guarantee means that if the business becomes unable to repay debt, then the individual is personally responsible.
With a personal guarantee, the company director or shareholder can pledge his or her tangible assets and agree to repay a debt from personal capital in the case of default.
A personal guarantee gives a creditor a legal claim to the personal assets of the individual, which can make credit more accessible for a business and improve the terms that will be based on the profile of both the business and the individual in the underwriting process. The personal guarantee offers extra security to the lender for their money in case the business fails to pay repayment of the loan.
Mounting Business Debt and Personal Guarantee Support
There are lots of businesses going into liquidation due to the failure of the business model or liquidity crunch to expand their services. If the business struggles to pay company directors, its dues then company directors may struggle to pay their own debt repayments. In other words, if a company is struggling financially the Directors can be left with debts they are personally liable for. It might be possible to resolve these problems with a Debt Management Plan (DMP) for Company Directors.
Company Directors and DMP –
Debt Management Plan for Company Directors
Directors of companies with financial problems often find themselves struggling with personal debt. Debts may have built up because they have borrowed money in their name to support the business. They may also have personally guaranteed company debt.
One of the main issues facing the director is that they have little or no income. Given funds are not readily available to pay personal debts the answer may be to start a Debt Management Plan. This is an informal agreement with creditors to reduce personal debt repayments to an affordable level.
There are the following advantages and disadvantages for company directors to be under debt management plans. (Debt management for company directors)
Advantages of Debt Management Plan for Company Directors
A Debt Management Plan is designed to allow you to pay what you can realistically afford to your creditors each month. Generally, creditors will agree to accept reduced payments and freeze or reduce interest charges.
- DMP can liaise and deal with all creditors and their correspondence. This includes dealing with phone calls, letters. This takes away the stress of creditors interaction with company directors and shareholders.
- If the creditors freeze interest and charges (Highly likely on credit cards and store cards), a DMP can help you clear your debts in a reasonable period.
- If you are struggling to meet your normal payments to creditors, a DMP allows you to pay an affordable monthly contribution, so you pay what you could afford each month after paying your priority household bills (Rent/Mortgage, Utility bills, Gas, Electric, Water, Phone and TV package, Car Insurance and travel, Food and groceries, council tax etc.)
- A DMP is flexible. You can terminate your plan at any time.
- A DMP is an informal solution and should ideally provide for you to clear your debt in less than 10 years. If the plan looks like it could take more than 10 years, a DMP may not be appropriate unless you feel your circumstances are likely to change which will enable you to clear your debt in a 10-year period.
- We at Acme Credit Consultants expect creditors to either stop further action to collect your debt or not to take such action. Our team members are attentive and will work hard to ensure creditors do accept your plan.
Disadvantages of Debt Management Plan for Company Directors
- A DMP is an informal debt solution and creditors are very likely to freeze interest and charges. However, some creditors may agree to reduce interest charges rather than freeze them.
- As a DMP is an informal arrangement, there are certain debts such as arrears of council tax, which cannot be included due to the risk of action against your assets. There are other solutions such as an IVA which can include arrears of priority bills, but it depends on IVA terms acceptance by a majority of your creditors
- A DMP could have a negative impact on your credit file. Creditors can issue default notices, which will remain on your credit file for 6 years. Your ability to obtain credit may be affected.
- You may from time to time receive an unwanted call from a creditor, especially if they are using a new debt recovery company. Politely tell them you are on a DMP and state your debt solution company name and your personal advisor. Your debt solution company will take care of the rest.
- It cannot be guaranteed that creditors will not take legal action or that they will stop collection activity. Such action could result in a judgment and could potentially lead to further enforcement to recover the debt.
- If you cancel your DMP, creditors could end payment arrangements previously agreed and charges could be re-applied to your debts.
There are other formal debt solutions (Bankruptcy, IVA, CVA or DRO) available to sort out your personal and company debt. Which can affect your personal/business finances and assets severely and must be consulted with a suitable debt advisor before deciding to take up one.
We hope this will assist in deciding if you want to take up a debt management plan as a company director. The pros and cons list can help you evaluate if you as a director should get your debts settled and managed with the help of a third party.
Acme Credit Consultants Ltd is regulated by the Financial Conduct Authority (FCA) to offer suitable debt advice ON YOUR DEBT PROBLEMS.
You can contact us on 0203 318 0990/ 0208 568 9687 for a free and no-obligation personal appointment to discuss your full case of director loans with Personal guarantees and if your business is unable to pay off business debt liability.