Self-employed - debt solutions Debt solution case study

Summary: Self-employed - debt solutions - the self-employed face particular circumstances when looking at debt solutions. This paper seeks to explore those issues.

Background

As a self-employed electrician, Mark knew the benefits and the downsides to being self-employed. A regular income from a paye job seemed very attractive on bad weeks, whilst self-employment seemed very attractive on the good weeks! Overall, Mark liked the idea of working for himself. He engaged the services of an accountant who produced Marks annual accounts and tax returns.

Cash flow

One of the main reasons Mark found himself in financial difficulty was down to cash flow. He knew the finances were on their way, but the rent, the bills and the essentials like fuel, food etc couldn't always wait. He consoled himself in the knowledge that credit card and an overdraft would bale him out. However, little by little, Mark found himself playing catch up. The debts grew and when the payments for jobs arrived there were more pressing needs than paying off the credit cards. The rent and most of the bills were relentless in their regularity - same day each month. If only income worked like that!

Tax

The dreaded tax word is never far from the surface. Mark was well aware of the need to se aside money regularly to meet the twice yearly tax bill (to say nothing of VAT). His accountant was usually good at forecasting - but the realities of meeting living costs, sustaining the business and enjoying the occasional luxury put a lot of pressure on limited funds.

When creditors become debtors

Mark was owed money. He was a creditor to a number of outstanding clients. One small business had gone to the wall without meeting an outstanding invoice of Marks. The domino effect meant that Mark himself was a debtor to the bank and the credit card companies.

Debt solutions

The big three of debt solutions - bankruptcy, IVA or a repayment plan are all options for the self-employed. Each will affect the credit rating, but not the ability to trade. Note however that company directors are not allowed to be bankrupt and a director at the same time. For the self-employed, demonstrating income is never easy, but annual accounts or annual tax returns should provide some help in calculating net profit after business expenses and tax provision (i.e. the equivalent of bring home pay).