Having a business that’s struggling with extensive debt problems can be exceptionally stressful. It can be difficult to know what to do in these situations, especially when creditors start to pile on the pressure to get back what’s owed to them.
While there are a number of different ways to approach these kinds of issues, one is to use a debt management plan. These plans aren’t universally suitable, however, and will only work in certain contexts - here’s where they might be suitable.
What is a debt management plan?
First of all, what exactly is a debt management plan, or DMP? A DMP is an informal arrangement that can be made between debtors and creditors, to organise some form of repayment arrangement. They will usually be brokered by some kind of debt management specialist such as Chamberlain & Co.
Unlike other debt repayment structures, the informal nature of DMPs means that there are no legal protections provided to either creditors or debtors. It’s important to be aware of these limitations when pursuing them as a potential option.
When do they work?
It’s important to note that debt management plans are not a universal solution, and historically, they have frequently been used in contexts where they’re not suitable.
When cashflow issues are temporary
Debt management plans are more likely to be suitable when cashflow issues are temporary rather than entrenched in your business’s economic future.
If your business is only entering further into a state of indebtedness, then you’ll need to find a solution that offers more formal legal protections, and potentially a more serious structural overhaul.
When your business is still solvent
To expand a little further on the point above, debt management plans are only suitable when your business is still solvent. That is to say, when your debts are not larger than your assets.
If you carry out an insolvency test and find that your business is in fact insolvent, you will be legally required to pursue another course of action. This will need to be done by working together with an insolvency practitioner, and will potentially mean liquidating your business to pay back creditors as much as possible.
When creditor-debtor relations allow
There also has to be a certain level of trust and goodwill between creditors and debtors for a debt management plan to be appropriate. Due to their non-legally binding nature, the two parties will need to come together and come up with a solution that they’re both happy with, while trusting the other side to do what’s right. This process can still (and in fact should) be mediated by a third party, but this won’t work if the relationship has soured.
Debt management plans can be excellent solutions to debt repayment if the circumstances allow, but the contexts in which they work are quite limited. It’s important to work with a qualified debt management professional, to make sure you navigate your situation properly. The implications for the future of your business are serious, and you want to get it right
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