Debt Settlement – What Are The Options?

It is the aspiration of many people struggling with their finances to settle their outstanding debts once and for all. Doing so can help them to move forward and start the journey towards building a better credit score with a healthy financial history.  

Settling a debt can require a significant lump sum, which is simply out of reach for many people. What’s more, whilst settling by paying less than the total amount owed might sound like an ideal solution, doing so can have a significant impact on your financial situation and ability to access further credit in the future.

Read on to find out more, and click through to our detailed guides for further information.

What is a debt settlement offer?

Debt settlement offer

A debt settlement offer, or full and final settlement offer, is a solution that allows you to repay what you owe by making a lump sum payment that is generally less than the total amount of remaining debt.

Typically, a settlement offer will be made by a debtor who has come into some money – whether from selling an asset, receiving an inheritance or gift or after collecting another windfall pay-out from a redundancy or insurance claim. Although for some people a payment of this kind might be enough to repay all of an outstanding balance, it is often the case that whilst the money could pay off a sizeable portion of what is owed, it won’t quite stretch to wiping the debt out.

In these circumstances, it may be possible to approach your creditors and strike up an agreement to pay a significant lump sum towards the debt, with the remainder being written off.

Will debt settlement help my credit?

Whilst approaching your creditors won’t impact your credit rating, agreeing to make a full and final settlement for an amount less than the total balance of your debt will result in a ‘partially settled’ marker being placed on your file.

This will only be removed six years after the partial settlement payment has been made, or six years after the debt defaulted if this happened before your settlement. This record of a partial settlement may contribute to lowering your credit score and general could make it more difficult to access further credit for the period it remains on file.

Can you settle yourself?

Debt Settlement Offer

It is possible to make a full and final settlement offer yourself simply by approaching your creditors and, armed with both a proposed lump sum figure and evidence of your financial situation, seeking an agreement to settle your debt.

That being said, many people understandably do not feel comfortable approaching creditors directly to make what can be a very bold proposition. In such cases, assistance can be found in the form of a qualified financial adviser or even a debt charity – both of which are in plentiful supply to UK borrowers.

Is debt settlement worth it?

Whether any debt solution is suitable for you will depend on your personal circumstances and so it’s impossible to say whether the settlement will be worthwhile for everyone. Whilst settling in full is to be encouraged where it is a realistic and possible option, making a full and final settlement offer for a proportion of your outstanding sums can have long-lasting repercussions, even despite the benefits of clearing an outstanding credit account.  

Only by reviewing debt solutions in light of your own unique situation can you make a fair assessment of which might be right for you, and where you feel unsure or confused you may find help in the form of a qualified financial adviser.

Are there other ways to settle debt?

As is demonstrated by full and final settlement offers, ‘settling’ debt does not necessarily mean paying off the full amount owed according to the payments agreed with a creditor. There are numerous other ways that people can deal with their outstanding liabilities and each option is suitable for a different set of circumstances.

If you do have the financial ability to make a lump-sum repayment, a single payment Individual Voluntary Arrangement (IVA) might offer a realistic alternative to making a full and final settlement offer. A single payment IVA involves arranging with your creditors to make lump-sum payment in full and final settlement – without the need to negotiate with each creditor individually as you would with a full and final settlement offer.

For more information about IVAs, DMPs and Scottish debt solutions like Sequestration and Debt Arrangement Schemes, read our overview HERE.