Full and Final Settlements
What are Full and Final Settlements?
In some circumstances, your creditors may be persuaded to accept a one-off, lump sum payment, which is less than the total amount owed, in return for writing off the remainder of the debt (e.g. they accept the lump sum as a ‘Full and Final Settlement’).
A Full and Final Settlement Offer will only be a suitable strategy if you have access to a large amount of capital, or if you have assets (such as property, antiques, works of art, investments, etc) that you are prepared to sell in order to raise the required amount of money to make an offer to your creditors.
You may have access to a lump sum due to a recent windfall, or have some savings you could use. You may even have a generous friend or relative who is willing to contribute a lump sum in order to help you deal with your debts.
If you are intending to sell any assets in order to raise capital, it is important that you only sell items that are not ‘essential’. For example, if you need a car for work or because you live in a rural area with poor public transport, it is not advisable to sell it. Likewise, certain household items (such as cookers, fridges, beds, furniture, etc) are essential for maintaining a healthy standard of living.
We strongly advise you seek advice before you decide to sell anything (particularly if you are intending to sell any investments, endowments or insurance policies, you should seek independent financial advice). A professional debt adviser may be able to provide you with an alternative strategy for dealing with your debts.
A creditor may accept a reduced lump sum as a final settlement of the debt if it is clear that the offer being made is the best possible return they are likely to receive. For example, if the creditor were to make you bankrupt instead, a large percentage of the lump sum would be swallowed up in legal fees.
How do I make a Full and Final Settlement Offer?
We strongly recommend that you seek professional debt advice when making a Full and Final Settlement Offer. An agency such as ourselves or your nearest Citizens Advice Bureau can advise you on what to do and help you to draft a suitable letter.
Any offer you make to your creditors should be made in writing. It is essential that you keep copies of any letters you send, in case a dispute should arise at a later date. If a creditor accepts a smaller sum in Full and Final Settlement, it is important that you have a deed drawn up to show this.Although it is not obligatory to use a solicitor to draw up such a deed, it may be advisable (particularly if the debt is large or particularly important). Do not send any payments until your offer is accepted in writing.
If your offer is to be split up between a number of different creditors, you will have to divide the lump sum using a ‘pro rata’ calculation. This will ensure that each creditor will receive a fair proportion of the available money, directly proportionate to the total amount you owe them.
In order to do this, you should take the amount you have for a lump sum, multiply this figure by the exact balance outstanding with the individual creditor, and then divide this figure by the total amount you owe to all of your non-priority creditors.
Lump sum available for creditors x amount owed to individual creditor / total amount owed to credit debts = Full and Final Settlement offer
Make sure that you keep copies of any letters that you send and receive.
If your offer is accepted, you should make sure that the creditor writes to the Credit Reference Agencies to show the debt as ‘settled’ or ‘satisfied’ on your credit record. A settled or satisfied debt is less damaging to your ability to obtain credit again in the future (should you want or need to). You should check that this has been done at a later date by requesting a copy of your credit record from the Credit Reference Agencies at later date.
What are the advantages of a Full and Final Settlement Offer?
The advantages of making a Full and Final Settlement Offer include:
- If the creditor accepts your offer, you will pay less than you would otherwise have to if you were to repay the full amount of the debt
- The debt will be paid off more quickly and easily than if you were to repay the debt over a longer term
- Providing that your creditors agree to your offer, it offers you a fresh start
- It should provide your creditors with a more attractive option than applying to make you bankrupt, due to the fact that in bankruptcy a large percentage of the lump sum would be swallowed up in legal fees
What are the disadvantages of a Full and Final Settlement Offer?
The disadvantages of making a Full and Final Settlement Offer include:
- You need access to a lump sum which could be used for other purposes, such as to pay other debts, or which could have been used to avoid the need for obtaining credit in the future
- Once your creditors know that you have access to a lump sum, they may not accept your offer and may take enforcement action against you to recover the all of the debt.