Redundancy payment during a debt management plan
If you receive a redundancy payment while you are in a DMP you can choose what to do with it. One option is to use some or all of it to write off debt.
Included in this article:
- What happens to a redundancy payment in a DMP?
- Using redundancy money to write off debt
- How to choose which debts to settle
- Can you keep all your redundancy payment to live on?
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What happens to a Redundancy Payment if you are in a DMP?
If you receive a redundancy payment during your a Debt Management Plan, you are not legally obliged to pay off any of your debts. You are allowed to keep the money and use it in any way you want.
Normally you will need to use at least some of it to pay your ongoing living expenses while you look for another job. This will be the case unless you know that you will get back into work relatively quickly.
That said, using some of your cash to repay debt is sensible if you can afford to do so. It will mean you are able to complete your DMP much faster.
Using Redundancy Money to write off Debt
You don’t have to use your redundancy payment to pay off all your debts in full. You can make it go much further by offering cash lump sums to settle individual accounts.
If you have been in your DMP for 6 months or more, it’s likely that the creditors will be open to settlement offers. This means you can pay amounts far lower than the outstanding balance. The remainder of the debt is written off.
Depending on how much your redundancy payment is you might be able to settle your entire Plan in this way. You could also have money left over to spend on other things.
It is possible to write off up to 50% of an outstanding debt by offering a cash lump sum if you have been in a DMP for 6-12 months or more.
How to choose which debts to settle
If your redundancy payment is not sufficient to settle all the debts in your DMP you have the option of paying off some but not others. This preferential treatment of creditors is allowed because the Plan is informal.
You can choose to settle a single debt at any time and leave the rest in the Plan if you wish. If you find yourself in this position the question is always going to be which debts should you deal with first?
Generally speaking you should prioritise any creditor who is continuing to add interest and charges. However if you have a large number of debts settling the small ones will make it easier to manage those remaining.
If your redundancy payment is not enough to settle all of your debts you might still be able to become totally debt free by using a Full and Final settlement IVA.
Can you keep all of your Redundancy Payment to live on?
If you want, you can keep all of your redundancy payment to live on. However in these circumstances it is important to remember that you still need to maintain your monthly debt management plan payments.
If you stop paying your Plan, the creditors will restart their collection actions against you.
To make your funds last longer, you could consider reducing your payments. This should be possible as long as the new payment offer is still reasonable.
If you simply can’t afford to continue paying, you should consider switching to an alternative solution. If you aren’t a home owner, think about going bankrupt. This option could be ideal because you don’t have to make further payments towards your debts if you can’t afford to.
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