Debt Management - A viable option to write off your debts

Published: 25th January 2010
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Full and Final Settlement- what does it mean?



Full and Final Settlement Offer is the partial payment offer that you can make to your creditor. This means that you convince your creditor to accept a lump sum from you that is less than the total outstanding amount. The creditor agrees to write off the rest of the debt in return of a lump sum payment.



A Full and Final Settlement Offer is a suitable strategy if you have a big amount of capital, or if you have assets (such as property, antiques, works of art, investments, etc) that you can sell in order to raise the required amount of money to make an offer to your creditors. You can afford to do this if you have got some money as savings. Sometimes it is possible that a friend or relative might help you pay off the creditors.





How to make a Full and Final Settlement offer?



• Write a letter to make full and final settlement offers to your creditors. Do not forget to retain copies of any letters you send.

• Make sure the creditor accepts your full and final settlement offer on paper. Do not forget to keep a copy in case there is a dispute in future.

• Do not pay a lump sum amount until the offer is accepted in writing.

• In case of a big debt, it is good to make a formal agreement by a solicitor and get it signed by your creditor.

• Get confirmation from the creditor that he will give in writing to change your credit reference file details so that it shows the balance is "satisfied" and the date. This is really important.

• A consultation with debt management companies might be helpful before you go for a Full and Final Settlement Offer.



Full and Final Settlement offer- Why would your creditors agree?

• It avoids (further) court costs - and taking court action does not guarantee your creditors about repayment.

• Receiving a lump sum may be more valuable to them than smaller amounts over a longer period

• Depending on your circumstances, creditors may consider the fact that you are unable to pay any more than this lump sum





How to calculate the amount in full and final settlement?



There might be multiple creditors among which you have to divide the lump sum. We use a "pro-rata" concept to make sure that each creditor gets a fair share of the money. The biggest share of the money goes to the creditor you owe the most. The smallest share goes to the creditor you owe the least.

First work out the exact outstanding balance you owe to each creditor.

Use the formula to work out how much each creditor should get.





FORMULA



Offer to the creditor = total amount available x each debt ÷ total amount you owe to your creditors.







Here is an example of the calculation:



You may have £10,000 owing to 5 creditors. You can raise a lump sum of £5,000.



You owe:

 £1000 to A

 £2500 to B

 £2000 to C

 £3000 to D

 £1500 to E



Using the formula:-



£5,000 (lump sum available) x £1000 (debt to A) ÷ £10,000 (the total amount you owe to creditors)



= £500 (offer to A)



The same calculation goes for each creditor, according to your individual debts to them. Make a table out of the calculations.Give offer letters to all your creditors along with this table. Generally creditors like the idea of receiving an offer on a pro-rata basis. It becomes evident to them that they are all being treated equally. If any of the creditors refuse, try to convince them by writing to them. Mention that the other creditors have accepted the offer and explain your circumstances again.



The following text could be used in a letter to send to creditors if you wish to work out an offer of payment in full and final settlement.

Creditor name

Address & postcode

Date

Dear Sir or Madam:

RE: Account No __________

I am currently unable to pay the money which I owe in full because __________. However, I have been able to raise some short-term funds and would like to offer you £_____ as an ex-gratia payment in full and final settlement of the account. This offer is made to you on the clear understanding that, if accepted, neither you nor any associate company will then take any action to enforce or pursue this debt any further and I will be released from any liability.

I also request that, if accepted, you will mark any entry on a credit reference agency file relating to this account as being "satisfied" in full.

Payment can be made within _____ of receiving your written agreement of this offer.

I thank you for you cooperation at this time and look forward to your response.

Yours truly,

__________





Remember: Do not pay any amount until your offer has been accepted in writing. Keep all confirmation letters for future reference.



You should also request a credit report from a Credit Reference Agency once the debt is settled. If your report does not reflect your debt settlement, it is important to get this updated; else you may find it harder to get credit in the future.






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