Debt Management Plan for Self-Employed – What’s Possible?

Are you self-employed and thinking about a Debt Management Plan (DMP)? Then, you are in the right place. We are here to help you understand what’s possible when you choose a DMP.

Our article will guide you through:

• What a Debt Management Plan (DMP) is and how it works
• The types of debts you can include in your DMP
• How to draft a payment offer for your DMP
• If you can use credit during your DMP
• Other debt solutions if a DMP doesn’t seem right for you

We know you might be worried about picking the right DMP for you. That’s normal! Over 170,000 people visit our website each month seeking advice on debt solutions.

We understand your worries and the need to keep your business going while dealing with personal debts.; some of us have been there too. With our expertise, we’ll help you understand how to manage your debts better.

Alternatives to a DMP if you’re self-employed

When the 1986 Insolvency Act first introduced Individual Voluntary Arrangements (IVAs), they were intended for use by businesses as an alternative to bankruptcy.

You’ll make a single monthly payment split among your creditors, just like with a DMP. The normal length of an IVA is five years, with an additional year of payments if you cannot use any of the equity in your house during that time. It will also appear on the public Insolvency Register and your credit report. However, all unpaid debts are eliminated at the conclusion of the arrangement.

You’ll probably be allowed to keep all of your assets, including your home if you’re a homeowner if you choose a self-employed IVA. In general, you must keep all tools and equipment necessary for your job to pay your creditors back. However, if you own particularly valuable non-essential personal or business assets, such as an expensive luxury car, you may be asked to trade it in for a less expensive model and contribute the difference towards your IVA.

Whether you are a lone proprietor or part of a partnership, IVAs are an option. And unlike bankruptcy, you have full freedom to join or leave a board of directors. Additionally, a self-employed IVA will be created to allow for the possibility that your payments may require additional flexibility in relation to your income. Additionally, an IVA will typically be a little more flexible than if you were in a conventional IVA for only personal debts, even though you will need the agreement of your IP to access more than £500 of credit during one.

» TAKE ACTION NOW: Fill out the short debt form

What Types of Debts can be Included in Debt Management Plans? 

Debt management plans are often preferable for individuals needing help managing unsecured debts. These could include credit card debt, bank loans, overdrafts, catalogue debt, etc. 

Secured loans and priority debts cannot be included in debt management plans as debt management plans are informal agreements. 

So, as a self-employed individual, any debts you owe to HM Revenue & Customs (HMRC) such as VAT arrears, cannot be included within your debt management plan. 

This is one of the reasons HMRC usually gives people 12 – 18 months to repay the debt(s) owed to them; Most debt management plans have much longer durations.

National Insurance also cannot be included in a DMP. 

Other priority debt(s), such as mortgages, also can’t be included within a DMP. Thus, you’re going to have to take this into account before opting for one. 

If you owe money in the form of priority debt(s), you’ll have to keep paying them off separately from your DMP. 

When you devise a payment plan for your DMP, the separate payments you make to HMRC (or other priority debt creditors) will be considered essential living costs. 

In conclusion, if you only have business debt or other priority debt(s) such as money owed to HMRC, council tax, mortgage debt, etc., then a DMP is not right for you. 

However, if you want to keep your business afloat while taking care of your personal debt simultaneously, then a DMP might be worth considering. 

How do I Draft a Payment Offer for My DMP? 

Debtors under traditional employment sit down with their debt management plan provider and draft their payment offer by calculating their budget. Working out the budget is relatively easier as these debtors have fixed monthly incomes rather than experience income variability in self-employment.

However, your monthly income most likely varies if you’re self-employed and run your business. This can throw a wrench in calculating a clear budget for your debt management plan. 

The key here is to use averages. 

Start by calculating your business’s average revenue over the last 6 – 12 months. Next, deduct your average monthly expenditure from it. This should give you an estimate of your spare income. 

Next, deduct any monthly payment you will be making towards creditors not included in your debt management plan, such as HMRC. This should leave you with a rough estimate of what you can afford to pay towards your debt management plan every month. 

When you run a business, drafting a payment offer for a debt management plan can get complicated. I highly advise you to seek debt advice from a professional instead of doing this alone. 

You can contact a debt charity such as Stepchange or Business Debtline. They can assess your financial situation and your business to determine what your payment offer should look like. 

By getting debt advice from professionals, you will drastically increase the chances of your payment offer being accepted by your creditors.

Thousands have already tackled their debt

Every day our partners, The Debt Advice Service, help people find out whether they can lower their repayments and finally tackle or write off some of their debt.

Natasha

I’d recommend this firm to anyone struggling with debt – my mind has been put to rest, all is getting sorted.

Get started

Reviews shown are for The Debt Advice Service.

Will I be Able to Use Credit During a DMP? 

It’s important for you to understand that a DMP, just like any other debt solution, has a severely negative impact on your credit score. 

Since a DMP involves you making reduced payments towards your debt, your credit rating will naturally go down. 

As a result, you may start having difficulties securing new lines of credit. 

While this may not be as big of an issue if you were a traditional employee, reduced credit access during debt repayment can definitely be a significant problem if you’re self-employed. 

For example, you may need a key supplier account or a certain credit card to run your business effectively, Something you may not have access to once you enter a DMP. 

Lines of credit that you require to run your business are extremely important, and you should discuss this with your DMP provider before entering into one. 

If your business fails to bring in revenue after you enter into a DMP, you could find yourself in more dire circumstances than before you opted for one. 

Hence, always ensure that any resources you need to run your business effectively won’t be difficult to obtain once you enter a DMP.