Debt Settlement Offer
Table of Contents
What Is A Debt Settlement Offer (DSO)/Full and Final Settlement?
If you acquire a lump sum of money and you have troublesome debts, then a Debt Settlement Offer (DSO) can enable you to pay that debt at a reduced amount.
Your lenders may refer to these agreements as either a “Partial Settlement”, a “Short Settlement” or a “Full and Final Settlement”.
If the lender agrees to the reduced settlement amount, then the remaining balance will be written off and you will be considered debt free with that lender.
How Does a Debt Settlement Offer (DSO) Work?
Firstly, a DSO is only suitable for those who are able to clear debt with a lump sum of money.
If you have received money, possible via an inheritance etc. and you have debts you have been struggling with, then you could suggest this option to your lender. Occasionally, this option could be suggested by your creditor if they feel it is appropriate.
An example of this is if you owe your lender £5,000 and you have a lump sum of £3,500, then, as long as you can pay it as one lump sum, your lender may agree to treat that as a final settlement figure. This can also be referred to as a ‘debt discount’. This is mutually beneficial since it reduces your debt, plus it allows the lender to clear a debt that otherwise may take a long time to collect.
Which Debts Can I Include In A Debt Settlement Offer?
There is no definitive list of debt types that can be included in a Debt Settlement Offer (DSO), but it normally applies to the following:
What If I Owe Money To More Than One Lender?
If you owe money to more than one lender then you will need to deal with each one separately, agreeing individual settlement figures as you go. However, it is important not to pay anything until you know which of your creditors agree and which don’t.
For example, if you owe money to four different creditors:
Personal Loan – £1,000
Utility Bill arrears – £500
Credit Card – £3,500
Payday Loan – £1,000
You owe a total of £6,000.
Now, if you receive a windfall of £5,000, you don’t have enough to clear your debt in full, but if you offered your lenders a reduced amount, then it may become more affordable. To give you the best chance of success with this, it is important to make an offer that is fair.
To get an idea of how much to offer, use this handy calculation – The amount of your lump sum multiplied (x) by what you owe that creditor divided (÷) by your total debt.
For the four creditors in the example above, it would work as follows:
Personal Loan – (5000 x 1000) ÷ 6000 = £833 (you may offer £833.33)
Utility Bill Arrears- (5000 x 500) ÷ 6000 = £416 (you may offer £416.67)
Credit Card – (5000 x 3500) ÷ 6000 = £2916 (you may offer £2916.67)
Payday Loan – (5000 x 1000) ÷ 6000 = £833 (you may offer £833.33)
This means you would pay a total of £5000 to your creditors, an amount you can afford. The remaining amount would be written off by the creditor as part of the settlement agreement.
What Happens If My Creditors Reject My Debt Settlement Offer?
It is important to remember that your creditors don’t have to accept your offer. If you are unsuccessful then, you could decide to pay off some debts (maybe to any creditors that did accept your offer) and not others. This could reduce your monthly outgoings, allowing you to focus on paying off your remaining debts in the normal way.
Alternatively, you could take out an IVA (Individual Voluntary Arrangement). This involves paying an affordable monthly amount, but you could speak to your Insolvency Practitioner about making a one-off settlement payment instead.
What Are The Advantages of a Debt Settlement Offer?
By paying your debts off in one lump sum, you become debt free quickly
You can set a DSO up by yourself, so it can be done at your pace
There are no fees involved
You will not be recorded on the Public Insolvency Register
What Are The Disadvantages of a Debt Settlement Offer?
- Creditors do not have to accept your offer
You will need to calculate your settlement figures – and whether you can afford them – yourself.
A DSO will negatively affect your credit score, since your lenders will often inform credit referencing agencies that you have only ‘Partially Settled’ your debt. This will impact your credit score for up to 6 years.
Who Can Help Me If I'm Struggling With Debt Repayments?
If you are struggling with debt, but you have received a windfall, then an IVA could be the better option for you. Contact IVA4Me to find out.
Debt Settlement Offer FAQs
What Is a Full and Final Settlement?
A Full and Final Settlement is another name for a Debt Settlement Offer.
How Much Can You Negotiate With Debt Settlement?
If you are considering making a Debt Settlement Offer to one or more of your creditors, then the question of how much flexibility there may be in the negotiations may be at the forefront of your thinking.
What Is a Reasonable Settlement Offer?
If you have debt that you have found difficult to cope with, but are fortunate enough to receive a windfall of money, whether through inheritance or a release of equity etc. a Debt Settlement Offer can be a great, cost effective way of clearing it down and starting again.