Can I Start A Business Whilst In An IVA?

Author Name Chris Richards Article date August 17, 2023

Individual Voluntary Arrangements (IVAs) were initially created to assist business owners in managing their debts, as established by the 1986 Insolvency Act. This approach provided benefits to both businesses and creditors by helping them avoid bankruptcy and allowing creditors to recover more of their funds than if the company had gone bankrupt.

Looking to apply for an IVA?

Looking to apply for an IVA?

Today, IVAs continue to be a valuable tool for business owners. However, due to their legal insolvency nature, questions often arise regarding the impact of IVAs on existing or new businesses.

Starting a business while in an IVA is indeed possible, but it is essential to consider the potential challenges and restrictions that may arise. For instance, obtaining credit or financing may prove difficult, as lenders may be hesitant to provide funds to individuals with an IVA. Additionally, it is crucial to maintain open communication with your Insolvency Practitioner (IP) and inform them of your intentions to start a business. They will offer guidance and ensure your new venture aligns with the terms of your IVA.

While an IVA may present certain obstacles, it does not necessarily prevent individuals from starting a business. By being aware of potential challenges, maintaining transparency with your IP, and carefully navigating the financial aspects, it is possible to establish a new business during an IVA.

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IVA Considerations for the Self-Employed

Entering into an IVA while self-employed is possible, but there are distinct aspects to consider. One key difference is the flexibility of contributions. As a self-employed individual, your income may fluctuate monthly, so your IVA payments can be adjusted accordingly. A cash-flow statement is necessary to inform your Insolvency Practitioner (IP) of these income variations. It’s crucial to maintain communication with your IP and notify them of any changes in your financial situation.

Regarding business-related credit, being in an IVA limits your access to it. However, for self-employed individuals, there may be some flexibility. You will still require your IP’s approval to obtain more than £500 of credit, but it might be possible to exclude a specific line of business credit from your IVA and repay it separately, allowing you to maintain a working relationship.

Lastly, concerning business bank accounts, if your account is overdrawn but needed for managing business expenses, you may be allowed to keep it. However, if the overdraft is substantial, including it in your IVA agreement could be a wiser decision. Be aware that if you have other credit lines with the same bank, they may exercise the ‘right to offset,’ seizing funds from your business account to cover other debts. In such cases, opening a new business account and including the old one in your IVA is typically the most suitable option.

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IVAs & Limited Companies: Registration and Responsibilities

Individual Voluntary Arrangements (IVAs) can be utilised by both sole traders and limited company owners. Even during an IVA, it is possible to register a business as a limited company. Unlike bankruptcy, an IVA permits individuals to hold positions as directors or shareholders of a company without any restrictions.

However, it is crucial to contemplate any alterations to one’s employment status while in an IVA, as maintaining the agreed-upon payments is essential for its successful completion. Though some flexibility is granted, prolonged inability to meet the original payment terms may necessitate creditor approval for a reduced amount. Creditors may not always consent to such changes, potentially jeopardising the IVA and, in some cases, leading to bankruptcy.

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Starting a Business During an IVA: Challenges and Considerations

While being in an IVA does not prevent someone from starting a new business, it is crucial to weigh the financial implications carefully. Launching a business may be a sound long-term choice, but it could be more beneficial to wait until the completion of the IVA or even until the credit score has been restored. The reason for this is the potential difficulty in obtaining credit and a business bank account during or immediately after an IVA. Banks and other lenders, upon noticing the IVA, will recognize the past credit repayment issues and exercise caution when considering lending.

It is essential to discuss any changes in employment status with the Insolvency Practitioner (IP) to ensure a smooth transition. In summary, while starting a new business during an IVA is not prohibited, it is vital to consider the potential challenges in obtaining credit and business banking services. Waiting until the IVA is completed or the credit score has improved may be a more prudent course of action. Always consult with the IP before making any significant changes to employment status to avoid complications.

Self-employed IVAs and your Assets

An Individual Voluntary Arrangement (IVA) offers a significant benefit over bankruptcy, as it allows you to retain your assets, including your property if you own a home. In most cases, a self-employed IVA enables you to keep all of your assets, making it an ideal solution for business owners seeking to repay their debts with minimal disruption to their trading activities.

However, there are a few exceptions to consider. Although IVAs were initially designed for business owners, there may be instances where selling some assets is necessary. By carefully evaluating your financial situation and understanding the terms of your IVA, you can make informed decisions about your assets and ensure a smoother debt repayment process.

A self-employed IVA provides a more favorable option for business owners compared to bankruptcy, as it allows for the retention of assets in most cases. While there may be exceptions requiring the sale of certain assets, understanding the specifics of your IVA can help you navigate these situations effectively and maintain the stability of your business during the debt repayment process.

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Business-related Assets

Starting a business while in an IVA is possible, as creditors often benefit more when your business continues to operate. To achieve this, retaining essential tools, equipment, vehicles, or technology is crucial, and you won’t be required to relinquish these assets. In some instances, you may need to replace high-value work-related assets with more affordable alternatives, contributing the difference towards your IVA.

For instance, if your business demands travel and you possess a luxury car, you might be asked to switch to a practical, cost-effective option. However, you will never be required to give up assets vital for your business operations. This approach ensures that your business-related assets remain intact, allowing you to pursue your entrepreneurial goals while fulfilling your IVA obligations.

Personal Assets

IVAs are designed to safeguard personal assets, including vehicles. In exceptional circumstances, you may be required to sell a high-value vehicle. However, if you can demonstrate its necessity for your work, particularly if you are self-employed, you may retain it or opt for a more affordable alternative. For low-value vehicles, it is unlikely you will be asked to sell, as the proceeds from the sale may not significantly benefit creditors after accounting for administrative costs. Seek debt assistance to explore your options further.

In summary, starting a business while in an IVA is possible, but it is essential to consider the impact on your personal assets. An IVA can offer protection for necessary assets, such as work-related vehicles, but you may be required to sell or replace high-value items. Low-value vehicles are typically exempt from this requirement, as the potential financial gain for creditors may be minimal. It is advisable to consult a debt expert to ensure you make informed decisions about your assets during the IVA process.

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Your Home

While an IVA does not put your home at risk like bankruptcy, you may be required to release some equity in the final year of the IVA term through remortgaging, depending on the amount of equity in your property.

For homeowners with £5,000 or less in equity, there is no need to release it for the IVA. Instead, you can opt for an additional year of monthly IVA payments or have a third party make a lump-sum payment, agreed upon by your creditors. Non-homeowners must also make an extra twelve payments or have a third party offer a lump sum.

Homeowners with more than £5,000 of equity will be asked to release up to 85% of it to complete the IVA. However, if mortgage providers refuse to remortgage the property, making it impossible to release equity, you must agree to an additional 12 months of payments or have a third party make a lump sum payment towards your IVA.

Where can I get more advice on IVA’s and other debt solutions?

Starting a business while in an Individual Voluntary Arrangement (IVA) is possible, but it requires careful planning and consideration. An IVA is a legally binding agreement between a debtor and their creditors, designed to help repay debts over a fixed period, usually five years. It’s essential to understand the potential challenges and restrictions associated with starting a business under these circumstances.

Firstly, obtaining financing for your new venture may be difficult, as lenders may be hesitant to provide loans to individuals with an IVA. Additionally, the terms of your IVA may limit the amount of credit you can access. It’s crucial to discuss your plans with your Insolvency Practitioner (IP), who will help you navigate the process and ensure compliance with your IVA terms.

Secondly, managing your finances is vital to the success of your business and maintaining your IVA. Proper budgeting and financial planning can help you avoid further debt and ensure your business remains viable. It’s also essential to keep your personal and business finances separate to avoid complications.

For more advice on starting a business while in an IVA and exploring other debt solutions, consider seeking professional guidance. Contact a reputable insolvency helpline or consult with an IP to discuss your options and receive the support needed to manage your debt effectively. Remember, it’s crucial to make informed decisions and be aware of the potential risks and benefits associated with starting a business during an IVA.

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