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What is a debt settlement offer?

Sharon McDougall - Updated - 3rd May 2024 - 5 minutes to read

Sometimes known as a full and final offer, a debt settlement offer is where you agree to make a lump sum payment to your creditors in order to settle the remaining debt you have with them. Often it will be the party that owes the money that will start the negotiations although sometimes creditors make the first move by sending a settlement offer letter with an amount they would be happy to settle for.

You may be tempted to negotiate a full and final (F&F) settlement with your creditors if your circumstances have changed and you have found yourself in a much improved financial position. This could be as a result of securing a more stable and better paid job, or alternatively due to a windfall such as an inheritance. If this is the case, tackling your outstanding debts is likely to be high up on your agenda. Despite this, you need to ensure you approach your creditors in the right way in order to get the best deal possible.

Why would a lender accept a settlement offer?

Creditors are not obliged to accept any offer for partial payment; however, many lenders will be open to negotiations in the right circumstances.

The first thing to note is that creditors will usually only accept a partial settlement offer on an account which is delinquent - that is one where you have fallen behind on your minimum contractual payments. If your account is up to date then your lender will be less inclined to accept a reduced settlement figure as they would rather you continue to make your monthly payments as usual and pay off the whole balance in the process.

However, if you have defaulted on your account then it is likely to be the case that you are paying a nominal sum towards your debt, typically through an informal payment plan. Depending on the sums involved, this could potential mean that it could take several years for you to fully pay back the money you owe. In some instances, a creditor may feel it more beneficial to accept a guaranteed lump sum now and write off the rest, rather than continue to accept the small instalments you are currently making.

By accepting partial payment now and closing your account, creditors are also able to mitigate against the risk of you falling behind in your payments again further down the line should your circumstances take a turn for the worse.

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What percentage of the debt should I offer?

A debt settlement offer is naturally going to be an amount which is lower than the full balance of your debt; however, knowing where to pitch this offer can be tricky. Too high and you will have paid out more than you need to, too low and you face your offer being rejected outright by your lender.

When making an offer your first concern should be ensuring that you have the funds available to stand by the amount you are promising. Remember, you are making an offer based on making an immediate lump sum payment; you are not negotiating a reduction in your debt to be paid off through ongoing monthly instalments.

Secondly, you need to be realistic in what figure is likely to be acceptable to creditors. Depending on how much you owe, your current monthly contributions towards the debt, and the length of time the debt has been held for, you may be able to negotiate a settlement figure of around 30% of the total amount owed. However, some creditors will take a much harsher view and will expect a figure closer to 70%.

Don’t be too disheartened if your first offer is rejected; there is nothing to stop you making another offer, or alternatively your creditor may even respond with a counter-offer of their own. However, if you fail to come to an agreement for a F&F settlement, you may need to consider entering into a formal debt solution such as a Trust Deed or Debt Arrangement Scheme (DAS) to better manage your outstanding debts.

What if I have more than one debt?

If you have more than one debt and are looking to arrange F&F settlements for them all, you will need to ensure you are proposing to split the money you have fairly in order to maximise your chances of success. Creditors are likely to want to see how you have arrived at your proposed settlement figure, so being able to show them your calculations and thereby demonstrate that you are keen on treating them all fairly is likely to work in your favour.

With this said, it is not a requirement that you have to make F&F offers to all creditors. You may decide to enter into negotiations with just one or two; bear in mind that you will still be responsible for paying those debts that you don’t reach a settlement figure for.

A word of warning

Before making the payment ensure you have it in writing that the lump sum you are offering is to be taken as full payment of the debt owed, and confirmation that your account will be closed and your credit reference updated to reflect settlement of the debt once payment is made. While some of the negotiations may be done over the phone, always make sure you have the terms in writing before transferring the lump sum payment.

While negotiating a F&F settlement on your debts can give you a huge amount of peace of mind and sense of accomplishment, you should be aware that not paying the full amount of your debt will have a negative impact on your credit file. Any debt you settle in this way will be reported as ‘partially settled’ on your credit report. This indicates that the debt has been cleared for a lower amount than was due. This will remain on your credit report for six years following the settlement, or the date you defaulted on the account, whichever was first. However, you should not let this put you off approaching lenders for F&F settlements, particularly as it is likely your credit file will already be damaged by this stage anyway.

Next steps

If you are struggling with unmanageable debt, the experts at Scotland Debt Solutions are here to help. We can work alongside you and your creditors to come to a mutually beneficial agreement regarding your debts, allowing you to look forward to a debt-free future. Call our team today on 0800 063 9250 to arrange a completely free consultation at your home or one of our five offices across Scotland.

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Sharon McDougall


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