When it comes to running a business, there’s no such thing as “a sure thing”. Changes in technology, the economy and even trends can bring a business to its knees. And that’s why choosing a company structure to operate a business is such a good idea. It limits the potential damage of the business’ debts to the business itself, providing protection for its director.
But setting up, running and growing a business takes money, and unless you have a large cash reserve you’ll probably need credit from banks, financiers, landlords and/or large trade suppliers. And in most cases, the only way to secure that credit is to sign a personal guarantee.
So what does this mean for you as the Director? Well, if your business closes or enters liquidation, and these guarantee creditors have outstanding debts, you may be forced to pay them out of your own pocket. Which means your business’ debts could well lead to your own personal bankruptcy.
And that’s something you’ll probably want to avoid.
Everyone we talk to in these situations says the same thing—they’d pay their debts if they could, but with the amount of money involved it’s simply not possible. And some people have an even bigger incentive to avoid bankruptcy. They may be a Director of other companies. They may have valuable assets to protect, such as their family home. And if they are in the building industry, it could affect their ability to earn a living in the future.
Structuring your affairs early (with help from a lawyer or accountant) is the best way to protect your assets. Having your house owned by your spouse or a discretionary trust can provide effective protection.
But not having these protective measures in place doesn’t necessarily mean you’ll be forced into bankruptcy. You may not realise this (some advisors don’t even know about it), but you can negotiate settlements with the creditors you owe money to.
Why creditors are willing to negotiate
The levels of personal and business insolvency have increased dramatically over the past seven years. And in that time creditors have learned that bankruptcy or liquidation often provides them with little if any return. And so those banks, financiers, landlords and trade suppliers who asked for your personal guarantee are now happy to consider alternatives that will give them a better return.
How Cactus Consulting can help
Knowing you can negotiate a deal with creditors is one thing. But coming up with a deal that benefits you and the creditor, and convincing them to accept it, is another.
Fortunately, our forward-thinking insolvency practitioners and debt advisers can help you negotiate a settlement with your Director guarantee creditors and avoid bankruptcy.
We’ll discuss the various options, and advise you on which is best for you. It could be:
- an informal arrangement (as we’re discussing here)
- a debt agreement
- a personal insolvency agreement
If an informal arrangement is your preferred option, and achievable within your means, we will then detail both alternatives (bankruptcy and your proposed settlement offer) to your creditors, along with the expected outcome of each.
The benefits of informal arrangements
Successfully settling your debts with informal arrangements like these gives you a number of advantages.
- There’s no record of the settlements on the National Personal Insolvency Index or your credit record.
- You avoid the three-year restrictions that come with bankruptcy.
- It’s cheaper than the alternatives.
- You can be debt free in a matter of weeks.
- You can bring your unmanageable debts into payment terms you can afford without accruing additional interest.
We’ve found that informal arrangements generally work best when:
- There are no more than five creditors involved
- The creditors are in the early stages of recovery action and haven’t incurred substantial costs
- Funds for lump sum payments or instalments are available from:
- personal funds
- the sale of your interest in a property, perhaps to the co-owner
- future income
- borrowings from friends, family or another source
We’ll start by asking you for various pieces of information (similar to the information a bankruptcy trustee would ask for), such as:
- bank statements
- background information
- finance and loan agreements
- details of your creditors.
The process relies on integrity, and so we need accurate documentation to support everything we tell the creditors.
We’ll then provide the creditors with the details of your financial circumstances, along with the most likely outcome for them under both options (your proposed settlement offer and bankruptcy).
For some creditors we may need to provide more information, or negotiate a little longer. But once all the creditors have accepted the settlement proposals, deeds of release will be prepared to document each agreement.
And once the agreements are documented and signed, you simply pay the funds according to each agreement and get on with your life.
Further information and questions
In our next blog post we’ll look at two situations where informal agreements helped Directors avoid bankruptcy and live relatively debt-free lives. But if you have questions about financial difficulties, structuring your affairs, director guarantees or settling your debts, don’t hesitate to get in touch with us.