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Full and Final Settlement

What is Full and Final Debt Settlement?

Full and Final Settlement or Debt Settlement is a method of paying off a portion of the balance of your debts in one lump sum; In return your creditor/s will agree to write off the rest of your debt. Generally people are able to do this because of coming into a windfall, using savings or in some cases a friend or relative will put forwards the money to help you pay off your creditors.

Normally in a Full and Final Debt Settlement there are signs to indicate that your circumstances are not going to change for some time, so it is in the creditors best interest to make this agreement with you. It should be pointed out to the creditors that the money will not always be available and if a friend or relative is putting forward the money they, will not make the payments unless the offer is accepted.

Entering into a Full and Final Settlement

If you want to enter into a Debt settlement you must have some sort of access to a lump sum of money. If you have more than one creditor, you may be able to work out each of their payment proposals on a pro-rata basis. The formula for working out your payments normally goes as:

The lump sum available
each creditor debt (calculate each creditor separately)
the total amount owed to all of your creditors
= Your offer to that creditor

EXAMPLE: You owe £12,000 to 5 creditors & have a lump sum of £5,000

You owe:
Creditor 1 = £3,100
Creditor 2 = £1.600
Creditor 3 = £4,200
Creditor 4 = £950
Creditor 5 = £2,150
        Total = £12,000


Formula for your creditors
creditor 1: £5,000 X £3,100 / ÷ £12,000 = £1291.67
creditor 2 : £5,000 X £1,600 / ÷ £12,000 = £666.67
creditor 1: £5,000 X £4,200 / ÷ £12,000 = £1,750
creditor 1: £5,000 X £950 / ÷ £12,000 = £395.83
creditor 1: £5,000 X £2,150 / ÷ £12,000 = £895.83
                                                            Total = £5000


Once you have worked out your pro-rata payments for your creditors, it is best to approach your creditors in writing with your proposal as your creditors will have to respond. You should keep copies of any letters you send. If the creditor accepts your offer, make sure you have it in writing, in case of any further disputes in later years. Also, get it in writing that the creditor will agree to change your credit reference file details to show the balance is 'satisfied' and the date. You can check that this has been done, with the credit reference agencies.

If the creditor does accept the amount, they will inform you when the payment should reach them by. Once the payment has been made, then the debt is settled.

If you are interested in or thinking about Full and Final Settlements, you can contact us at Debt Advice and we will be happy to help.

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