Debt Settlement Offers
Debt Settlement Offers
What is a Debt Settlement Offer?
A debt settlement offer (DSO), also known as a full and final settlement offer, is a way to pay off a debt in one large lump sum.
If you find yourself with a financial ‘windfall’ such as an inheritance or money from a friend or relative, a debt settlement offer could be viable option to clear your debts by offering to pay a certain amount upfront.
Money from compensation, the sale of an asset or pension if you’re over 55 could also be included in a debt settlement offer.
How does a DSO work?
If you’re in debt and you come into a lump sum of money, you may want to make a debt settlement offer to the people you owe money to. If your creditors accept the offer, they will agree take a percentage of the overall debt upfront, and write off the rest.
The money you offer as a debt settlement is shared equally across all of your debts, or, if you don’t have enough money to cover this, you can opt to settle specific debts instead.
A debt settlement offer will appear on your credit file as ‘partially settled’, which shows future creditors that the debt you owed wasn’t repaid in full. This will appear on your credit file for six years.
If you are struggling with debts but you don’t have access to a lump sum of money, you may be better served by a debt solution like a Debt Management Plan (DMP), which allows you to repay your debts over time using a series monthly payments.
What is considered a reasonable full and final settlement offer?
When looking into debt settlement, the first thing many people ask is what might be considered a reasonable offer. How likely creditors are to accept your offer will depend on various factors, including:
- Your overall level of unsecured debts
- Who your creditors are, and how much they’re looking for
- How big your lump sum is
- The amount of that lump sum you can afford to use as a lump sum payment
Ultimately, the sum of money creditors are willing to accept depends on the creditor – a credit card company might want X payment, will the bank might be hoping for Y. A good rule of thumb, however, is to make sure you offer the same settlement amount to every creditor.
Debt Settlement Offer with multiple creditors
If you owe money to a number of creditors it is possible to pay with one lump sum, if they all agree.
By doing this you’d make a ‘pro rata’ offer, which involves dividing the lump sum amount between creditors in proportion to what you owe.
The process of arranging a DSO with multiple creditors is much the same as if you’re only paying one, however you are required to work out how much of the lump sum to offer each creditor.
Calculating your Debt Settlement Offer to multiple creditors
The calculation is simple:
Multiply the lump sum by the exact individual debt owed to one creditor.
Divide this by the amount you owe to all creditors
That total is the amount you should offer to the relevant creditor
Please refer to the example below:
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
Can I use a lump sum to negotiate a debt settlement on my own?
If you come into a lump sum of money, there is nothing to say you can’t use that money to negotiate a full and settlement with your creditors in the hope of ending your debt repayment early.
Creditors will be happy to negotiate with you personally if they believe the lump sum payment you offer will go some way to clearing your debts. That said, there are debt charities and debt advice companies whose job it is to negotiate debt settlements on your behalf.
The advantage of using a third party to negotiate your final settlement offer is that they are industry experts. They can assign you a debt adviser who has the experience of dealing with creditors, and although they may charge a fee, the debt settlement they reach may save you money in the long run.
What happens if a Debt Settlement Offer is rejected?
If your application for a DSO rejected there is potential to use the money you have acquired and for an IVA if you’re a resident of England, Wales, or Norther Ireland, or a Trust Deed in Scotland.
What will a DSO do to my credit report?
Making a full and final settlement offer will have an impact on your credit rating. Unfortunately that impact is likely to be negative, in the short term at least.
When you make a full and final settlement and the creditor accepts the offer, it is generally less than the total amount you owe. Even though they have accepted the offer and agreed not to pursue you for the remaining balance, legally that debt is still counted as a partial settlement.
As such, a debt settlement offer will be listed as partially settled on your credit report. This is only likely to be viewed by credit reference agencies or a future lender, like a bank or mortgage company, but it may temporarily harm your credit score, making it harder for you to access credit in future.
Where can I find out more about DSOs?
If you have come into a lump sum of money, using it to pay off your debts is a sensible option. It can help you end harassment from creditors chasing payments, and means you will no longer be liable for the debts you have settled.
It does come with downsides, however, which is why you should always take debt advice before going ahead with a settlement offer.
At Carrington Dean, we’re Scotland’s debt specialists. We can offer you advice on whether a settlement offer is worthwhile for you, and even help negotiate it on your behalf. If you want to put your debt behind you, contact us for further support.
Frequently Asked Questions
It is a debt solution that allows you to pay your creditors in one lump sum. It is also commonly referred to as a full and final settlement offer. The money is shared equally amongst all of your debts, or, if you don’t have enough money to cover this you can opt to settle specific debts.
Asking for a settlement on your own won’t hurt your credit score. However, succeeding in obtaining a settlement, or skipping payments as some settlement companies will advise you, will have an adverse effect on your score. This type of debt relief can actually be as damaging to your credit score as bankruptcy can, because you aren’t paying the balances in full.
You will be required to do some math to work out how much to offer. We suggest multiplying the lump sum by the exact individual debt owed to one creditor, dividing this by the amount you owe to all creditors and the total is the amount to offer to that creditor. We have provided an example for this above.
Settled accounts will generally stay on your credit report for seven years from the date it was reported settled, which will have a negative impact on your credit score as you are settling the debt for less than originally agreed.
If your offers are rejected by your creditors, you may be able to use the money to apply for other debt solutions such as a Trust Deed, or an IVA if you live in England, Wales or Northern Ireland.