Business owners and the self-employed often reach these crossroads with irregular income and a business to protect. Here are five decisions that tend to arrive at this stage, and what each one trades away.
1. Remortgaging or Releasing Home Equity
Borrowing against a home to clear credit cards and loans is appealing because the headline interest rate is usually lower and the monthly figure looks manageable. Unsecured debt becomes secured debt. The home is now security for borrowing that previously carried no such risk. If repayments later fall behind, a mortgage lender’s remedies are far stronger than a card provider’s. Spreading the balance over a mortgage term can also mean paying more in total.
Before acting, it is worth asking whether the underlying problem is being solved or simply moved onto the house. That could be spending above income, a cash-flow gap in the business, or a drop in earnings.
2. Rolling Everything Into a Consolidation Loan
A consolidation loan can make sense when it genuinely lowers the interest rate, replaces several payments with one affordable figure, and the borrower stops using the cards that caused the problem. It makes less sense when the only way to achieve a lower monthly payment is a much longer term, when the loan is secured against an asset, or when the cause of the debt is left untouched.
Business owners should be particularly careful about combining personal and business borrowing without understanding which liabilities are theirs personally and which belong to the company. Consolidation is a tool rather than a solution.
3. Talking to Creditors Directly
Contacting lenders early is a legitimate first step, not an admission of failure. Regulated lenders are required under FCA rules to treat customers in or approaching arrears with forbearance and due consideration, and they must not operate a policy of refusing to negotiate with someone who is developing a repayment plan. In practice that can mean a temporary reduced payment, a freeze on interest and charges, or an agreed arrangement over several months.
These are informal agreements. Creditors can refuse, and unless the terms say otherwise they keep the right to pursue the full balance later. For many people, a few honest conversations are enough.
4. Choosing a Formal Debt Solution
When informal arrangements cannot bridge the gap, structured options exist, each with its own conditions.
A debt management plan (DMP) is an informal arrangement, not insolvency and not a loan, in which unsecured creditors are asked to accept reduced monthly payments.
An individual voluntary arrangement (IVA) is a legally binding agreement supervised by an insolvency practitioner, usually lasting five years and sometimes six. It starts only if creditors holding 75 per cent by value of those voting agree, and any eligible debt remaining at the end is written off.
A debt relief order (DRO) may suit those with debts under £50,000, spare income of £75 or less a month, assets under £2,000 and no home of their own. It lasts 12 months and has no application fee.
Bankruptcy sits alongside these. For those considering bankruptcy specifically, understanding the pros and cons of bankruptcy is essential before committing. It offers a clean break and typically ends with discharge after 12 months, but the application fee in England and Wales is £680, and a home can be sold if that is the only way to pay creditors. The bankruptcy stays on the credit file for six years. While bankrupt, a person cannot act as a company director without the court’s permission, and a sole trader’s business is closed. That is often the decisive point for business owners.
None of these routes is automatically better than another. Suitability depends on income, assets, debt level and what needs protecting.
5. Doing Nothing
Inaction is also a decision, with its own costs. Interest and charges continue to build on most unsecured debts, so the balance grows while the options shrink. Missed payments damage the credit file, creditors move on to default notices and eventually court action, and an unpaid county court judgment can bring enforcement agents into the picture.
Delay closes doors too. Someone who might have qualified for a DRO can drift above its thresholds, and a business that an early arrangement might have steadied can reach the point where only insolvency remains. Waiting rarely preserves choice.
The Trade-Offs Are the Point
Every decision at this stage exchanges one set of risks for another. Security for lower interest, time for breathing room, a credit record for a fresh start. The question is never which option is painless but which trade-off fits the circumstances.
For anyone unsure which route applies to their situation, professional debt advice can make the difference between a decision that helps and one that makes things harder. That means a regulated review of income, assets, debts and obligations, with a clear explanation of what each solution would mean in practice. Firms authorised by the FCA to advise on formal and informal debt solutions across England, Wales and Northern Ireland, Debt Advisory Servicesamong them, exist to carry out that review before anything is signed.
