A debt settlement offer is a negotiation between you and your creditors in which you agree to make a lump sum payment to settle your debts, usually for less than the total amount owed.
If you owe significant debts to creditors, it can be a useful way to avoid bankruptcy and take control of your financial situation.
In this article, we’ll explore the things you need to know about making a debt settlement offer to creditors, including what percentage of your debts to offer, how the process works, and the impact this type of debt solution can have on your credit profile.
What is a Debt Settlement Offer?
Debt Settlement Offers, also known as a full and final settlement offer, is a way for people to deal with their debts by offering a lump sum payment to a lender to settle your account.
People often turn to this solution if they end up with a lump sum of money in the form of inheritance, money raised from the sale of an asset such as your house or car, or a gift from a friend or family member.
How does a debt settlement offer work?
When you make a debt settlement offer, the money is split as equally as possible amongst those that you owe money to then settle your accounts.
If it isn’t enough to clear your debts in full, then it’s possible to make an offer to your lenders to accept a lesser amount in exchange for writing the remaining balance off.
For the most part, this type of solution is carried out by you as the consumer, which involves a lot of negotiation.
However, in some cases, you may be offered the opportunity to settle a debt for less than the outstanding balance by a lender.
What percentage should I offer to settle debt?
If you’re struggling with multiple outstanding debts, it may be possible to pay them off with one lump sum payment if all your creditors agree.
This is known as a pro-rata offer, which involves dividing the lump sum payment between your creditors in proportion to what you owe each one.
The process of arranging a Debt Settlement Order (DSO) with multiple creditors is similar to doing so with a single creditor, but you’ll need to calculate how much of the lump sum payment to offer to each creditor.
Here’s an example of how to work out the amount to offer each creditor:
- Multiply the lump sum payment by the exact individual debt owed to one creditor
- Divide the result by the total amount you owe to all creditors
- This total is the amount to offer to that specific creditor
That means if you have a lump sum of £3,500 and owe £3,200 to a credit card company, £1,000 to your bank and £800 to a pay-day loan company, you should offer:
(3500 x 3200) ÷ 5000 = 2240 £2,240 to credit card company
(3500 x 1000) ÷ 5000 = 700 £700 to your bank
(3500 x 800) ÷ 5000 = 560 £560 to the pay-day loan company
However, if you have enough to pay your debts in full, it’s best to do so in order to protect your credit report from the worst of the damage.
Debt Settlement Offers advantages and disadvantages
This type of solution can seem like all pros and no cons, but that isn’t the case at all. As such, we’ve laid these out for you below:
Advantages of a Debt Settlement Offers
- Resolve debts with a lump sum payment that’s often less than the total debt.
- Potential to avoid bankruptcy while regaining financial control.
- Debt settlement can lead to closure on your outstanding debts.
- Opportunity to rebuild credit score after settling debts.
- Stops creditors from pursuing collections and legal actions.
Disadvantages of a Debt Settlement Offers
- Lenders aren’t obliged to accept settlement offers, which can cause uncertainty.
- You need a substantial sum of money to make a reasonable settlement offer.
- Defaulting during settlement negotiations may harm your credit score.
- Settlements are noted on credit reports and affect creditworthiness.
- Failure to repay all debts in full will harm your credit profile.
How to make a full and final settlement offer
This solution can seem fairly straightforward, but it can be very easy to make a wrong calculation somewhere or have negotiations break down.
As such we’ve laid out the process below for you to help:
Work out the right lump sum amount
Once you know how much money you have, you then need to calculate how much to offer to your lenders, whether it’s a credit card company or a payday loan firm.
If your lump sum is enough to clear your debts, then this will be very simple and all you need to do is pay off how much you owe.
However, if you’re dealing with an amount that isn’t enough to pay off your debts, then you can use the formulas available online to work out how much to offer each one.
Send the full and final settlement offer to your creditors
Now it’s time to make the offer to your lenders. You should always ask them to confirm their decision to you in writing and never send them any money until you have this.
It’s important to keep any letters, emails or messages from your lenders regarding your offer for a good amount of time after you have settled the accounts. This should be done as a security measure should you need to refer to them at any time.
Negotiate with creditors if necessary
In some cases, some or all of your lenders may not agree to the settlement offer. In these situations, you will need to negotiate with them individually.
This can sometimes end up in you paying a higher amount to one lender, leaving you no choice but to make a payment plan with the others to help repay the remaining balances on your debts.
Make the lump sum payment
Once you have everything confirmed in writing, you can then go ahead and make the payments to your lenders.
The accounts should then be closed down – unless arrangements have been made for you to either continue making payments or using the account.
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What happens once your creditors accept a settlement offer?
Once your creditors accept a debt settlement offer, and you make the agreed-upon lump sum payment to them, they will consider your debt settled in full or partially settled, depending on how much you offered.
It’s also important that you make sure the settlement agreement is in writing and includes all the terms of the agreement, such as:
- The amount of the lump sum payment
- The payment schedule
- The release of any claims against you.
It’s always a good idea to seek professional financial advice before making a debt settlement, to ensure that it’s the best option for your specific financial circumstances and that the process is handled in the right way.
Will a debt settlement offer appear on my credit file?
Yes, a debt settlement offer will typically appear on your credit report in the UK, but how the settlement offer appears, and the impact it will have on your creditworthiness, depends on how your debt has been settled.
When you make a partial settlement on a debt, it will be recorded as a “partial satisfaction” or “partially settled” on your credit file.
A partial settlement will have a negative impact on your credit score, and it will remain on your credit file for six years from the date of the settlement.
If you have repaid your debt in full, the record of the debt will still appear on your credit file in the UK, but it will be marked as “satisfied” or “settled” instead of “partially satisfied” or “partially settled”. This indicates that the debt has been paid in full and can help to improve your credit score.
Regardless of whether you made a partial or full settlement offer, this information will be visible to credit reference agencies and other lenders for a period of six years.
As a result, it’s important to carefully consider the potential impact on your credit score before making a debt settlement offer.
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