If you have debts that you are struggling to pay, one option that you can consider is asking your lenders whether they would accept a lump sum in full and final settlement of the debt.

This can be a good way to reduce your monthly outgoings. However, there are also downsides of using a full and final settlement offer to eliminate your debts. And you need to be careful when negotiating the offer.

What Is a Full and Final Settlement Offer?

Let’s say you’re paying £200/month to repay a £5,000 debt over three years. Let’s say that you’re halfway through the loan period and you have £2,500 outstanding on the debt. And let’s say that you receive a windfall of £1,500.

If you’re struggling to find £200 each month to make the repayments, your lender might accept that £1,500 as full and final settlement of that debt. That way you’d no longer be paying £200 each month to repay the debt.

The lender will also be happy because they get a guaranteed £1,500 repayment earlier than they were expecting. The alternative from the lender’s point of view is that potentially they will get nothing because you cannot afford the monthly repayments, so you will default on the debt.

To ask your lender to accept your full and final settlement offer, download our free letter template.

The Downsides of a Full and Final Settlement Offer

The first, and perhaps obvious downside is the fact that not everyone has a windfall that they can use to make a full and final settlement offer.

However, this type of arrangement can suit someone who has just been made redundant. If you find yourself in this situation it could be that you have a redundancy payment that can be used to make a one-off payment to settle the debt but won’t have any income coming in each month and so wouldn’t be able to meet the monthly repayments.

It can also be suitable for someone who has received an unexpected inheritance. Again, you won’t be getting an inheritance each month so it would be in the lender’s interest to accept a full and final settlement offer if it is unlikely that you will be able to make the monthly repayments.

It’s also an option for someone who won’t be able to work again because they’ve been injured or have an industrial disease. If you have been awarded compensation your lender may agree to a full and final settlement offer.

If your lender accepts your full and final settlement offer this means that they won’t chase you for any further monthly repayments. However, unless you have agreed something specific with your lender, the debt will show on your credit history as only having been partly settled. This means that it will affect your credit score so it might be difficult for you to get credit for up to six years.

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Negotiating the Full and Final Settlement Agreement

The first thing to bear in mind is the fact that your lenders are not obliged to accept any full and final settlement offer that you make. What this means is that you have to make sure that it is in their interest to accept your offer.

The amount that you offer in full and final settlement of the debt will have to be fairly close to the outstanding amount so your lenders don’t have to write off too much of the debt. And they need to believe that there is a risk that if they do not accept your offer there is a chance that you will be unable to keep up with the repayments at some point in the future.

If you have more than one debt you might decide that you want to make more than one full and final settlement offer rather than simply paying off one or more of your smaller debts. The problem with this is the fact that if you lender sees that you have a pot of money available, they might decide that they want a larger share of that pot.

In this scenario you would need to decide whether you wanted to try to arrange a one-off debt management plan that cancelled some or all of your debts via full and final settlement offers or whether it was simpler to pay off the ones you could afford and then repay your remaining debts conventionally. As an alternative, you could negotiate with one lender – possibly one of the ones with a higher interest rate – and hope that by giving them “preferential status” they would more more inclined to accept your offer.

Remember that in any negotiation, your starting point is not usually where you will end up concluding the deal. If the maximum amount you can afford as a full and final settlement is £1,500 it might be in your interest to offer a slightly lower figure first so that you have room to compromise if your lender insists on a slightly higher figure.

Making Sure the Agreement Is Watertight

If you are considering a full and final settlement deal, it can be worth seeking legal advice. This is even more important if the amount of money involved is substantial. It is also worth making sure that all of your discussions are in writing and that you keep copies of everything.

This avoids any misunderstandings at a later date. Otherwise you could find that once you have paid the lump sum your lender might claim that they weren’t aware that your intention was that the amount you have paid was in full and final settlement of your debt. The lender could claim that it was merely a contribution towards your debt and that they are still expecting you to continue with your monthly repayments.

You should also make sure that the agreement makes it clear what happens if your financial situation changes. If you won’t be able to repay your debt because you have been made redundant, what happens if you get another job?

A full and final settlement offer will affect your credit score, but can be a good way to get your finances back on track if you are struggling to make your monthly repayments but you are in a position to make a one-off payment to clear the debt.

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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