What is a full and final settlement on my debt?

If you can`t afford to repay your debts as agreed and have fallen behind with the repayments, but you do have a reasonable amount to contribute as a lump sum (e.g. savings or an inheritance), you may be able to offer a `final settlement` to your lenders. This is the offer of a final payment that will settle your debt and stop them from pursuing you any further, as the remaining balance will be written off.

How can I make a full and final settlement offer?

You can make a final settlement offer either directly to your lenders yourself or with the assistance of a debt adviser/debt management company.

Either way, you (or your debt adviser) will need to put together a letter explaining your circumstances and detailing your final settlement offer. This should set out your current income and day-to-day essential expenditure, how much you owe to each of your lenders and the amount you can afford to pay to each. The letter must make it clear that the payments are being offered on the understanding that the remaining debt will be written off.

How do I work out how much to pay my creditors?

The fairest way is to look at how much you have as a lump sum, and then divide this proportionately between each of them, based on the amount you owe to each.

So, let`s assume you owe a total of £10,000 to five lenders, but you only have a lump sum of £5,000. You owe £4,000 to lender A, £3,000 to lender B, £2,500 to lender C and £500 to lender D.

The formula for calculating how much you can pay to each lender is:

Lump sum available x individual debt owed
÷
Total debt

So, for debt A: £5,000 x £4,000 ÷ 10,000 = £2,000.

By the same calculation you`d offer £1,500, £1,250 and £250 to lenders B, C and D respectively.

However, your lenders aren`t obliged to accept a reduced final settlement, and in some cases your settlement might be arranged differently - depending on what your lenders are willing to negotiate, you might end up paying certain debts in full, or a higher proportion of some debts than others.

Are my creditors likely to accept the full and final settlement?

This can`t be guaranteed. Whether your creditors accept the offer will depend on whether they think it is the best way for them to get back as much as possible of the money they are owed.

For example, if you have no regular income, or your long-term circumstances are not likely to improve, but you have a lump sum that you can offer your lenders, they may see the final settlement as their best option.

However, if there is no reason why you can`t contribute to regular monthly payments - even if they are not as high as originally agreed - your lenders might prefer you to repay your debts over the longer term, either through an informal arrangement, through a debt management plan or through an IVA (Individual Voluntary Arrangement).

Before you commit to offering a final settlement, you should speak with an expert debt adviser, who can help you to decide if that`s the best option for you. Call us today on 0800 161 3516.