Debt Management Plan and lump sums
Summary: This paper looks at the options open to someone in a Debt Management Plan (DMP) who receives or has access to a lump sum.
A DMP is an informal debt solution, whereby the debtor makes affordable monthly payments to their creditors usually through a DMP Company. Questions sometimes arise as to what happens if the creditor receives a lump sum.
Clearing the debt
The most obvious use of a lump sum is to clear some or all of the debt. It may be argued that the debtor has a moral responsibility to clear the debt as quickly as possible. It is also likely that it is in the debtor's interests to clear the debt as quickly as possible. It is perfectly appropriate to contact the creditors concerned, make the payment to clear the debt, cancel the standing order to the DMP Company and inform them that the debt is cleared and the plan ended.
Creditors are understandably interested in lump sums and settling debts. It may well be that they will offer a reduced figure to settle the debt by way of making a lump sum payment. There are no rules for this and creditors may vary considerably in what they can offer at any given point in time. Again a debtor can simply contact creditors direct for this or discuss with their DMP Company to see if they can negotiate favourable settlement figures for them.
Withholding a lump sum
The lump sum may come with some conditions attached e.g. an inheritance with a specific purpose in mind. Or it may be that there is a pressing need that some or all of the lump sum has to be put towards e.g. car replacement or clearing mortgage arrears. Because a DMP is an informal, flexible repayment plan, this is perfectly possible.
DMP and a Full & Final IVA
It could be that a lump sum creates an opportunity for applying for a lump sum IVA. If for example a debt is being repaid over a long period of time through a DMP, and a friend/family member offered a loan to help clear some of the debt, then the monthly payment used in the DMP could be used to repay the loan, and the lump sum offered as an IVA.