Is Debt Management suitable if Self Employed
If you are self employed or run a sole trading business, using a Debt Management Plan (DMP) is an option. However there are various implications you will need to consider.
Included in this article:
- Which self employed debts can you include?
- How to calculate what you can pay into the Plan
- Can you still use credit facilities?
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Which self employed debts can you include in a Debt Management Plan?
A debt management plan can be a sensible solution if you have normal banking debts. For example credit cards, bank loans, overdrafts and payday loans. If you are self employed you can also include a business credit card, loan or trade balance. However it may not be suitable if you have other types of creditors particularly HMRC.
Debt owed to HMRC such as tax or VAT arrears can’t be included. The main reason for this HMRC will normally only give a maximum of 12-18 months to pay debt owed to them. Any DMP you set up is likely to last much longer than this.
You will therefore have to make a separate time to pay agreement with HMRC to manage debt owed to them. If you can’t afford to repay them within these timescales you will need to consider a different solution such as an IVA.
Other debts which can be difficult to include in a debt management plan are CCJs. Also suppliers if you want to continue using them.
How to calculate what you can pay into your Plan
As a self employed person your income probably varies each month. As such working out what you can afford to pay into your debt management plan is not straight forward. So how do you do this? The answer is use average figures.
First work out your average monthly business revenue for the past 6-12 months. Then deduct your average monthly expenses. Then deduct a provision for tax (to ensure you have sufficient to pay future tax bills). The figure you are left with is your average monthly income (known as drawings).
Now take your average income figure and deduct the total of your personal monthly living expenses. The amount left over is what you can pay into your Plan each month. It is called your surplus income.
If self employed starting a debt management plan yourself is not easy. We can help. Give us a call (0800 044 5407) or complete the form below.
Can you still use credit if you start a Debt Management Plan?
It is important to understand that when you start a debt management plan your credit rating will become poor. As a result you will find it hard to get new credit facilities.
You may need to continue to using credit to run your business. Perhaps a key supplier account or a credit card. Where this is the case you can keep these accounts out of the Plan but you must maintain the repayments as normal.
If you owe money (perhaps an overdraft) to your personal or business bank this debt can be included in your Plan. However you may have to open a new account with a different bank to ensure any money you pay in in future is protected from the banking sett off rules.
Leaving debts out of a DMP is not normally recommended as the other creditors can view it as unfair. However if you need credit facilities to run your business it may be possible.
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