A reader asked if they should use a gift to offer a Full and Final settlement (F&F) on some of the debts in their Debt Management Plan (DMP). F&Fs are explained in detail here. The simple answer is that this is almost always a good idea. I’m going to use as an example your sister offering you a gift of £2,000 – in a F&F this could potentially be used to clear £3,000, £4,000 or more of debt so that is an excellent use of the money. There are a few things to think about, so let’s explore possible situations.
Do you have any priority debts?
Priority debts such as rent or mortgage arrears, council tax arrears, utility debts etc usually have to be handled outside a DMP. However you may already have made an arrangement to repay the priority debt before your DMP started, in which case the priority debt repayment would just have continued. If this is the case, one alternative to using the gift to make a F&F is to clear the priority debt.
You can’t make a full and final settlement on a priority debt – the creditor knows you are going to have to repay it in full, as a result they are so unlikely to accept an offer it’s not worth bothering to try for this.
Clearing the priority debt might be a good idea if you think there is a problem with your current arrangement to repay it. Perhaps you need to move to a larger house but the Housing Association won’t let you because you have rent arrears – that would be a good reason to use the gift to pay the rent arrears.
If you have only just started a DMP, then you may not get a low F&F offer accepted. If your £2,000 will only clear £2,500 of non priority debt, then you might well prefer to pay off the mortgage or council tax arrears. But if your £2,000 can clear a lot more credit card and loan debt and you are happy with the current rate you are clearing the important priority debts, then go for a full and final settlement!
What sort of F&F offer should you make?
This depends largely on how long you have been in a DMP for and how large the repayments you are making each month are:
- a long time making token payments and your creditors may be happy to accept 25p in the £ or even less, especially if the debt has been defaulted and sold on to a debt collector
- if you have recently lost your job, you are fit and aged 30, then your creditors are probably not going to settle for less than 80% and may refuse any offer
- if you can supply medical evidence to suggest you won’t be able to return to work for a long while, if at all, they are also more likely to accept a low offer. This could be a copy of a hospital appointment letter say, it doesn’t have to be a specially written letter that your GP may charge you to write.
Should you make the same offer to all your creditors?
In theory in a DMP you should make the same offer to all your creditors. But if your total debts are £12,000, then you may prefer to use that gift of £2,000 to pay off a couple of creditors in full. This is one of those times where it’s good to be running your own DMP – you just choose who to write and offer a F&F settlement to.
If you are using a firm to administer your DMP, then talk to them about what you should do. Explain that your sister is only offering the money if you can use it to get F&F settlements. After you have cleared some of your debts, you are going to be able to pay the remaining creditors more each monht, so they will be benefiting in a way from the gift.
Is the gift large enough to settle all your debts?
If it seems likely that the money could well settle everything, then you might want to think about whether it would be worth choosing a single payment IVA instead of making seperate full and final offers to each creditor. A single payment IVA has the advantage that if two thirds of your creditors vote to accept it, it is binding on all your creditors. It has the disadvantage that it takes time to organise and involves paying the IVA fee, so less money actually goes to the creditors. Talk to your DMP company about whether they think this might be a good choice for you.
A final thought about taking the gift
That gift – can your sister actually afford it? Don’t let someone else get into money problems trying to help you out…