How Debt Management Plans Handle Overtime Pay

When people establish debt management plans, they agree to make a certain monthly payment to the plan administrator, which is then divided amongst creditors. The payment is based on factors including income and regular household expenses. But, what if income varies due to overtime pay? A person with a debt management plan in place may wonder if this extra money must be paid into the plan or if it can be kept to save or spend otherwise.

If you decide to enter an Individual Voluntary Arrangement (IVA) or debt management plan (DMP) an annual review is done each year to assess your changes in circumstances. If you have had a significant increase in your income your payments may increase, if your income has reduced or your living expenses have changed your payments may reduce. If you are unsure and require for advice, please contact us to discuss the best debt management plan that can handle overtime pay.

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Debt management plans are typically based on regular income

It does not make financial sense to include occasional overtime or bonuses in this calculation. On months when these are not paid, the individual will be left short on cash and may be unable to make debt management plan payments. Basing these payments on the steady portion of income makes the arrangement more comfortable for the debtor.

Contractual employment arrangements for some workers include guaranteed overtime. In this situation, creditors may require the inclusion of this money when determining the monthly debt repayment amount. The plan is not conducive to regular adjustment of the monthly payment and creditors may find it cumbersome to adjust their systems for different repayment amounts, even if the payment exceeds their expectations. Therefore, a debtor is not advised to increase the payment during months when overtime pay is received.

There are, however, smart ways to use this extra money

Contributing it to an emergency fund can help prevent debts from arising in the future. The money can be used for unexpected home or vehicle repairs, allowing the individual to pay for these without having to skip a debt management plan payment. Having a cash reserve equivalent to between six and twelve months’ worth of regular earnings is a good idea.

The money can also be used to establish a fund for settling debts at a future date. Creditors may contact a debtor while a debt management plan is in force, making settlement offers. If the debtor agrees to repay a specified amount of debt, the creditor will write off the remaining balance. This can help the debtor complete the debt management plan sooner than initially anticipated. The overtime will go to good use by repaying debts so the individual can become debt-free more quickly.

Workers should not avoid earning overtime when they are using a plan to manage their debts. However, they should plan how they will use the money. When it comes time to work extra hours, they will know exactly how to handle the earnings. There will be no need to worry about creditors pestering them for more money due to the temporary increase in income.

Debt management plans make it easy for people to repay their debts and get back on track. Earning overtime provides more money to save for emergency expenses or meet creditor settlement offers. So, work away and rely on the fact that the extra earnings will have good use. A debt-free future awaits and the more you earn, the more comfortable the lifestyle will be.