Debt settlement offers can help you improve your financial situation when you’re in unmanageable debt. Also known as full and final settlements, they involve paying a pre-agreed sum to your creditor, which ends the financial contract between you.
It’s important to consider the advantages and potential disadvantages of making debt settlement offers, however, and how they might affect you in the future. So how do debt settlement offers work, and what are the pros and cons?
A debt settlement offer is a proposal to one or more creditors to pay a proportion of a debt as a final sum. You would then have no further obligation, and could consider the contract ended.
Your creditors may be open to negotiations on a final settlement, particularly if you’ve fallen significantly behind with payments, as debt collection procedures are expensive to carry out.
So what are the advantages and disadvantages of debt settlement offers?
Clearing an agreed proportion of debts that have become unmanageable helps you avoid sequestration – the Scottish term for bankruptcy. Creditors may decide to force you into bankruptcy if you take no action, and a well-considered debt settlement offer can prevent this.
Fresh financial start
If you’re able to clear one or more debts that have become unmanageable, you can start afresh financially. You might choose to save the money you’ve been using to repay debt in the past, and build an emergency fund to help you deal with unexpected outlays.
No pressure from creditors
Creditor pressure can be insidious. It reaches into our everyday lives, and we don’t always realise the negative effect it has on our health. If your debt settlement offer is accepted and you’re able to clear one or more debts, creditor pressure for these debts will stop.
Effect on credit file
When a debt is partially repaid, as happens when your debt settlement offer is accepted, the creditor may place a ‘P’ marker on your credit file next to your debt. This remains on your credit record for six years, and shows that the borrowing has only been partially repaid.
As some of the debt has had to be written off, this can affect your ability to borrow in the future. If a borrowing application is accepted, you may have limited your access to the best deals.
Needs a cash lump sum
You need a lump sum of cash to repay the borrowing if a full and final settlement offer is accepted. This could be a redundancy payment, for example, an inheritance, or a windfall such as a lottery win.
If your creditor doesn’t accept the offer of full and final settlement, other options are available to help you escape debt for good. The Debt Arrangement Scheme (DAS) and Scottish Trust Deed are both formal procedures that prevent legal action by creditors, and allow you to repay your debts over an extended period of time.
Obtaining professional insolvency assistance is helpful when making debt settlement offers - it ensures the sum you offer truly reflects your financial position and the history of repayments you’ve made.
Scotland Debt Solutions can help you make an accurate and realistic debt settlement offer, and provide reliable advice on your financial situation as a whole. We specialise in helping Scottish residents to escape debt, and offer free same-day meetings. Please contact one of the team – we operate a network of offices nationwide.
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Our Scottish based team can help advise you on your debt problems.