What to do with a redundancy payout if you're in debt

What to do with a redundancy payout if you're in debt

March 12, 2018 by Sandra

 

It seems as if the United Kingdom - and even the entire world to a certain degree - has been firmly in the grip of financial uncertainty forever. The heady and prosperous late nineties and early-2000’s are well in our rear view mirror now, yet the damage and recession brought on by the worldwide banking collapse of a decade ago still lingers for many.

Plenty of people and organisations have still managed to thrive in this often perilous environment, but many businesses have struggled. Those struggles appear to be coming to something of a head of late as we’ve seen some pretty major companies making sweeping redundancies across their workforces (the latest being huge retailers like Maplins, Toys R Us and New Look). In more extreme cases, some of these huge firms have gone either into administration or even liquidation.

Whether the reasons behind these business collapses are external or internal, to employees now without a job - it’s entirely irrelevant. They’re left without employment and face some very real financial concerns indeed.

If this is something that you can relate to, you’ll know just how stressful redundancy can be. Especially if you have the added worry of being in personal debt.

Discuss your position with friends and they may glibly remark about your redundancy package and how it’s ‘free money’. But underneath the jokes, everyone knows that only the most generous of redundancy packages shifts those being put out of work into an enviable position.

Redundancy - especially when you face mounting debts - is no laughing matter. But it might not quite be the desperate position you think it is. In fact, there are - believe it or not - some upsides to this ostensibly grim situation.

We want to help. So we’ve come up with a guide on how to best handle your redundancy money when you’re in personal debt. We think it should help.

To help fully explain our advice, let’s use an example...

John is a married 35 year-old man from Nottingham with two small children. John and his wife Carol have a mortgage on their three-bedroomed terraced house, but with very little equity in it. John and Carol owe £25,000 in unpaid credit card bills to several credit card companies..

John is made redundant from work* and is due to receive a £15,000 payout. So what does he do with the money? Well, as tempting as it may be, we obviously don’t advocate he whisk the family away to the Caribbean for an all-inclusive holiday. So what do we advise…?

Well, first of all - we’d recommend John and Carol sit down, get the calculator out and do a comprehensive and honest audit of their financial position. What do they have? What do they owe? What are their outcomings? Where can they cut back? Can they free up any money if needs be?

Once they know their real position, it’s time to plan what to do with that £15,000.

John is looking for a new job, but that will take time. So the redundancy money is vital here. But does he keep it under lock and key? Spend it? Throw it all at the mortgage? Give it to various credit card creditors? Well, our advice is this - a little of all of them.

Here is what we would say to John and Carol about what to do with their money:

  1. Fill up the freezer - This isn’t an insolvency term, it’s not jargon. We mean it literally. Go out and have ‘a big shop’. Stock up on foods that will last and buy any fundamental and inescapable necessities. Whatever happens in the next few months, the couple need to still eat and care for themselves and their family. Cover the basics and it’s surprising how much stress that can alleviate.
  2. Ensure that the mortgage is up to date - If it’s not, make sure that it is. Square up with your mortgage provider. Then ask them about any insurance you have with them. Is there a clause in the contract about deferring monthly repayments in times of financial hardship? If so, explore those options with them.
  3. Pay off a few months’ worth of the mortgage - Secured debts like mortgages should be your priority here. You do not want to lose your house. If there’s not a payment deferral option, pay off a few months of the mortgage upfront. Most mortgage providers won’t levy a charge for advance payments of just a few months.
  4. Consider how much you can afford to pay creditors - Unsecured debts are the next port of call. But you needn’t just hand over all of the remaining pot of money…

 

A lot of people in this situation will panic. Let’s say John and Carol are smart enough to follow our advice. They’ve spent £500 on shopping and essentials and paid (or set aside) £4,500 towards the mortgage for the next six months. That leaves £10,000 left over. They owe £25,000 to their creditors. Even if they were to hand over that £10k, there’s still a shortfall of £15,000 that they’d owe. So it doesn’t entirely solve their problem.

Certainly, some of that £10k should go to paying off some of their debt. But we wouldn’t recommend just handing it all over to the creditor that shouts the loudest. John is now unemployed and actually in a unique position to nix those debts without having to fully pay them off. He can do this by making a 'full and final settlement offer' to his creditors, whereby a reduced amount is paid to them and the debt is written off.

Effectively, it’s a deal that says, ‘something is better than nothing’ and has only been made possible by coming into money in uncommon circumstances such as redundancy or inheritance.

His creditors would expect John to give full disclosure over income and expenditure for the whole household and provide them with a comprehensive statement of all asset and liabilities along with the offer. Full disclosure of his offers to all the other creditors would also be required by everyone as well.

When he makes them, the offers will be 'without prejudice' and in 'full and final settlement of the debt due’. They will be what’s known as ‘pro rata’, meaning that all creditors are given a fair share (if it’s 40p in the pound, creditors owed the most, receive the most). If the offers are accepted, John should ask for the acceptance in writing, pay them off and then that’s that. Sorted.

But this plan requires John and Carol to hatch and execute their plan entirely themselves. Which is, understandably, time consuming, stressful and not without its risks. There is an alternative. Turn to us.

An experienced and professional insolvency practitioner like us can set up a plan for you and handle all of the communication with creditors. We could help you enter into an Individual Voluntary Agreement that’s affordable and designed to ease you out of unaffordable unsecured loans that you just can’t realistically pay back.

Redundancy can gift you an opportunity to haul yourself out of debt. It just takes a little calm on your part and some honesty about your position. If you’d like further advice - or to enquire about how IVAs work in more detail - why not contact us today?

 

* John here received his redundancy payout because his company were making staff cutbacks. But had they have gone into liquidation, they may not be in a position to pay John and his former colleagues the redundancies owed to them. Were that the case, John could have applied to The Insolvency Service (a government agency) for them to pay his entitlement. They may also cover any outstanding holiday pay, as well as any owed commission, expenses or other funds owed by the collapsed company.

 

Filed Under: personal debt, Redundancy

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