Debt Management Plan

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).

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When would a Director consider a Debt Management Plan?

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 own 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.

Advantages of a DMP for a Director

There are a number of advantages a Director can gain by using a DMP. Firstly they are free to continue in their role. They can also take up new directorships in other companies if they like. This might be an important part of the strategy for rebuilding their personal income.

In addition the payments required to sustain the Plan can be very low. This is good if the Director has little personal income available for paying their own debt.

It may also be possible to settle debt in a DMP early if a lump sum can be found.

The plan is also relatively flexible. If the reduced payments turn out not to be sustainable the plan can be re-negotiated. There is little risk that the director will be forced to go bankrupt.

Disadvantages of a DMP for a Director

One of the main problems with the DMP solution is that creditors do not agree to write off any debt. As such if the director can only afford minimal monthly payments it will take a considerable time to become debt free.

Clearly if the director is employed by a company which is struggling it is unlikely that they will be able to draw an income of any significance. The opportunity to increase payments and pay off the debt faster will therefore be minimal.

Another significant downside of the DMP solution for Directors is that HMRC debt cannot be included. Very often a Director of a small struggling company will have personal tax liabilities. It is unlikely that HMRC will agree to these being included in a long term Debt management Plan.

Using a DMP will also have a negative affect on the director’s credit rating. Once in the Plan they are unlikely to be able to borrow more on a personal basis. If they work in a small company this might also affect the company’s ability to get credit.

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