How to Make a Full and Final Settlement Offer
If you’ve been in a difficult financial situation for some time now, with debts piling higher and no way out in the foreseeable future, you might want to consider making a full and final settlement offer. With a full and final settlement offer, you can draw a line under troublesome debt, allowing you to start afresh.
What is a full and final settlement?
A full and final settlement is a lump sum payment made to your creditor. This is a part payment of the total debt that you owe. A full and final settlement offer is made on the condition that any remaining debt will be written off.
An acceptable offer for full and final settlement will be based on your previous history of repayments as well as your current ability to repay.
Even though the amount that you offer will be less than the creditor initially stood to receive, the creditor will benefit by receiving a significant proportion of the remaining balance in one go, without having to send debt collectors or continue to pursue the debt through the courts.
When is a full and final settlement offer made?
If you’re already on a debt management plan (DMP) or you have recently defaulted on your debt, your creditor may write to you suggesting a full and final settlement, though it is more common for the debtor to make an offer first. The debtor will usually make an offer after receiving a lump sum of money.
How does a full and final settlement work in practice?
In order to make the full and final settlement offer, you’ll need to have access to a lump sum of cash.
Of course, if you’re in debt, it’s not always likely that you’ll have access to such readily available cash, but a full and final settlement may be an appropriate solution if you’ve just received one of the following:
- Redundancy Pay
- Accident Compensation
- A PPI payout
- Money from the sale of an asset
- Money from a family member
- Pension funds
When you contact your creditor, you should make your creditor aware of where the money is coming from. You should provide a written record of your income and expenditure so they recognise the value of accepting a reduced payment in lieu of the full amount.
It’s important for your creditor to understand this value of the payment in order for them to accept your offer, especially if they’d have to wait a considerable amount of time before you ever cleared your full outstanding debt.
What percentage should I offer for a full and final payment?
A lump sum payment can be beneficial for creditors and debtors alike – but that doesn’t mean the ball is always in your court when it comes to making an offer.
Chasing payments can be considerable expense for creditors, but they will still need to be convinced if they are to accept a final offer that is considerably lower than the total amount owed.
There is no set percentage that you should offer for your full and final payment as it’s all relative to the amount of debt you’ve paid off already and how much you still owe.
If you have only repaid minimal amounts or you have missed several repayments, the creditor is going to be more inclined to accept a lower offer. If you have only missed one payment but you can prove that you are in financial difficulty, the creditor may still accept a full and final settlement offer, though it will likely have to be a higher proportion of the overall debt.
What are the advantages of making a full and final settlement offer?
There are two main advantages of making a full and final settlement offer, benefiting both the debtor and the creditor:
- The rest of the debt will be written off, so you’ll be able to start from scratch without looming debt.
- Although the creditor won’t receive the full payment, they will still benefit from receiving a lump sum of money instead of waiting months or years for full repayment.
Licensed insolvency practitioners can provide help if you choose to make an offer of a full and final settlement.
What are the disadvantages of making a full and final settlement offer?
If you have more than one creditor chasing you for payments then a full and final settlement offer may not always be the best option. If your offer of a full and final settlement leaves you with no funds to pay the other creditors then you may still face legal action.
You need to first consider whether making a full and final settlement offer to only some of your creditors will actually improve your financial outlook. If you are unsure, a debt adviser can help you to assess the likely outcomes.
What happens when a full and final settlement offer is accepted?
According to the Financial Conduct Authority (FCA):
”If a firm accepts a customer’s offer to settle a debt, it must communicate formally and unequivocally that the offer accompanied by the relevant payment has been accepted as settlement of the customer’s liability.”
Basically, if the creditor agrees to your settlement offer and you make the correct payment, they must drop the rest of the debt for good.
However, you should keep hold of any written documents relating to your settlement in case there is a dispute at a later date.
Will a full and final settlement affect your credit rating?
Because some of your debt had to be written off, this will still affect your credit score for up to six years.
For at least six years then, you should keep official settlement documents safe on hand in case you need evidence that the debt has been cleared.
The debt will be removed from your credit file once it has been settled, though credit reference agencies may mark a “P” next to the entry on your credit report to show that a partial settlement was made in this instance.
What if my settlement offer is rejected?
There is no guarantee that the creditor will accept a part payment in lieu of the full balance. If your offer is rejected, you might still be able to apply for a Trust Deed (similar to an IVA in England, Wales and Northern Ireland).
Is a full and final settlement the right option for me?
You may find a number of sample letters available online, but it’s best to seek debt advice in the first instance.
At Scottish Debt Expert, we provide a free, friendly initial consultation. We can help you assess whether making a full and final settlement offer is the right course of action, or whether there are other, more suitable debt solutions available.