How to Settle Creditor Debts Through a Full and Final Settlement
- What is it?
A full and final settlement is when a creditor or multiple creditors agree to accept a lump sum payment now in return for writing off a proportion of the debt, e.g. 40p in £. It can be used in many instances but typically when a debtor has come upon hard times, and they are now unable to make the contractual payments on loans or credit cards.
- How does it work?
The debtor, either on their own or via an adviser, needs to outline their circumstances; reasons for their insolvency, details of their assets and liabilities and income and expenditure.
They then need to produce an offer, outlining what is being offered, where the money is coming from and when it can be paid. If there are multiple creditors, then the offer needs to be presented on a pro rata basis so it is clear to each creditor what the others are owed, what their share of the debt is and what share of the lump sum they will get.
Once all creditors have agreed to the offer in writing, then the relevant payments need to be made. In return, the creditor needs to write back confirming receipt of the payment and the fact they or their agents will no longer pursue the debtor as the debt is has now been settled.
- Pros
- Fair and open way of sharing payments, widely understood by creditors
- Whilst negotiating with creditors they usually agree to freeze interest or charges
- If creditors accept a full and final offer and the payment is made the remaining debt is written off
- It avoids having to enter into a formal insolvency procedure such as bankruptcy or an IVA
- Cons
- Creditors may refuse to agree with what you propose although they can’t refuse any payments you make to them
- Creditors may refuse to freeze interest or charges
- The debtor’s credit file will be marked up as only “Partially Settled” against each debt included in the settlement
- Is it for me?
A full and final settlement may be the right advice if the debtor has a lump sum available or there is a friend or family member who is willing to help out.
Typical situations where a full and final settlement may be suitable are those where the debtor has trapped equity in their house and the money is offered in lieu of such equity, or they are a sole trader whose business requires credit accounts with their suppliers, and they can’t afford to have anything formal on their credit file.
If the debtor doesn’t have much in the way of assets, then bankruptcy or a debt relief order may be more suitable.
