Helping a friend in £20k debt

Someone24972

Hello,

One of my best friends is in a bit of trouble. I'm helping him sort it out but wanted to come here first to ask for advice and to make sure I'm not missing anything.

He is a freelancer, and as such has his own business.

He owes:

• Book keeper £525 for 2-3 years work
• HMRC £3,000 for corp tax 2 years old
• Accountant £1,800 for old work (£900 due now)
• Overdraft £1,300
• Bank loan £4,300
• Friends and family £6,500
• Phone bill £100

His bank (Natwest) are threatening to close his account if he doesn't repay his overdraft, and he's in arrears with his bank loan. Book keeper and accountant are chasing hard for payment.

His phone is disconnected as he hasn't been paying the bill. He has no cash.

Estimated income:

• April £1,200
• May £3,200
• June £1,600
• July £1,600

I've gone through his budget with him, and a reasonable monthly spend is £685. This includes business agency fees, work travel, etc etc.

Repayment wise, this gives him £4,860 between now and the end of July.

In my opinion his priority is to sort everything out that could affect his ability to work, as that's his lifeline right now.

So, first priority would be pay off the overdraft £1,300 to ensure there are no problems with his bank and being paid, £900 to his accountant to ensure they continue to file his books etc, and £100 to pay off phone bill and get connected again. I can lend him the money to do this right now.

Then over the coming months, focus on paying off the accountant, book keeper and HMRC (bank loan can wait if he keeps up payments of ~£100 a month or so).

I am also encouraging him to:

- Keep a log of what he is spending to ensure he sticks to budget
- Look for other work (eg removal van companies pay well and will fit in with his sporadic work he currently does)

He's my best mate, and in a bad way so I really want to help him in his time of need! Is this plan sensible, and is there anything else he should be considering doing?

Money lent to friends and family is bad, but I don't think there's anything he can do about it right now.

Fortunately for him, he's currently rent free living at his dads house. The relationship is not good though and there's no chance he can borrow more money from family, but at least he's got a roof.

Tixy

He might want to get some advice from the business debtline charity. https://www.businessdebtline.org/
They'll be able to help advise on a plan and the priority he needs to give to the HMRC debt and how to set up a repayment plan with HMRC.

I assume the income figures are his projected business turnover and that he is a limited company? does the budget you have helped him work out include both company expenses and personal expenses?

Are the debts all company debts except for the friends and family?

Someone24972

Hi Tixy,

Thanks for responding.

- Income is conservative projection
- He is Ltd

Budget is everything he needs to keep afloat right now, includes company expenses and personal expenses. Broken down:

Food: £160 p/m
Travel: £240 p/m
Entertainment: £120 p/m
Agency fees: £115 p/m
Phone bill: £50 p/m

Phone bill is expensive, have told him to dump it and get a cheap PAYG but he's locked in a 2 year contract, and he doesn't want to lose his number because it could mean less work going forward.

Apart from friends/family, all debts are business debts.

Will check out business debt line, thanks for the link.

andyfromotley

If you lend him money i would take the position that you will never see it again.

He is running a business that on the face of it is not profitable enough for him to live on and pay his bills, with a sporadic income. He needs to be honest with himself if this is viable and would he be better off just getting paid employment?

Someone24972

To be fair to him, the type of business he is in is seasonal. I do beleive he makes upwards of £20k per year pre tax. Not a huge amount but enough to live on.

Debt was a culmination of horrible spending and money management, coupled with a difficult time in his life.

I do expect I will be paid back, but I am happy to wait years if that's what it takes, and am prepared to write it off if it comes to it as the friendship is far more important to me.

Unfortunately the other friends and family he's borrowed from is straining their relationships, but that's the situation he's found himself in so has to deal with it.

audigex

As long as you're prepared to accept this money is written off, I see no harm in you giving the friend money.

Do view it as giving, though, not loaning - if he pays it back years down the line, that's a bonus, but don't expect him. Friendships change, or he may just never be in a position to return it.

Other than that, I agree with the above, work out payment plans with anyone possible, then prioritise with the new numbers.

And much as it's frowned upon, it may be worth him looking at a consolidation loan to allow him to pay him back these accrued lump sums and return to a more sensible monthly outgoing, even if it costs him more in the long run: that depends on his current credit situation.

Annisele

If he trades through a limited company, then I think he should separate out his own personal debts from the company's debts. He should also separate his own assets from the company's assets (bearing in mind that if he's borrowed any money from the company, that money counts as the company's asset and his debt).

If he doesn't do that separation, he won't understand what he personally owes. (And he won't know if he's trading while insolvent - which is an extremely bad idea).

For example, presumably the bookkeeper and the accountant are owed money from his company, and not from him personally? But the family loans are personal debts?

MoneyMission2015

I was also going to say to make sure he is treating personal & business debts separately.

One other thing though I noticed, I do think £120 entertainment per month is a lot of money when he owes family & friends £6500. He needs to cut this back quite a bit.

Sazzie23

He is very lucky to have a friend like you, I hope he appreciates it.

You sound like a sensible organised person and that is what he needs, perhaps he is the business end and you are the organisation part of the team.

I would also say take the view that you won't see the money again, even though he sounds like the sort of person that would want to pay it back, he might not be able to and may not feel the same priority to pay it back as you do which could strain your friendship.

Good luck

tlc678910

Going forward does he need to use an accountant. It is a huge expense that could be avoided by filing his own tax return.