This guide tells you how to offer your creditors a reduced sum to pay off your debt, rather than the full amount you owe. If the creditor agrees to your offer, it should stop further action. This is called a ‘full and final settlement offer’. You might make this kind of offer if a relative or a friend can provide you with the money.
Use this guide to:
This guide includes an example calculation to show you how to work out your own offers.
The sample letters mentioned in this guide can be filled in on our website.
Full and final settlement means that you ask your creditors to let you pay a lump sum instead of the full balance you owe on the debt. In return for having a lump-sum payment, the creditor agrees to write off the rest of the debt.
You may be able to do this because you have come into some money or have some savings you can use. Sometimes a friend or relative offers to put forward a lump sum to help you pay off the creditors. If your circumstances are unlikely to change for the better in the future, you can explain why this is. It is also very important that you explain to the creditors that the money will not be available forever and the friend or relative will not make the payments unless the offer is accepted.
If you need time to get debt advice and find a debt solution, you may want to consider applying for breathing space.
Breathing space will stop most types of enforcement and also stop most creditors applying interest and charges for 60 days.
To find out more, see our Breathing space guide.
Priority creditors have stronger powers to get their money back than non-priority creditors. It is unlikely that a priority creditor will agree to a full and final settlement offer. You should make arrangements with priority debts separately to your non-priority debts.
You will usually need to use some, or all, of the lump sum you have to clear your priority debt first. Examples where you should clear your priority debts first include having:
There may be some situations where you don’t have pay off all your priority debts first, but you need to be careful. If you are thinking about settling non-priority debts before you have repaid your priority debts, contact us for advice.
If you are thinking of applying for a DRO or bankruptcy, it may not always be a good idea to repay only some of your debts first, contact us for advice.
A deficit budget means not having enough money to pay for all your essentials, such as your home, food and travel to work. See our Cost of living: if you can’t afford your essential costs page for advice on completing a budget sheet and what you can do if you have a deficit budget sheet.
If you have a deficit budget sheet, you need to think carefully about whether you can afford to use your lump sum to make full and final offers.
If you do need to use your lump sum to balance your budget sheet now but your situation improves in the future, you can consider using the remaining lump sum to make full and final offers to your non priority debts.
You need to be careful about what you do next if not all of your creditors agree to a full and final settlement offer. Think about whether other debt solutions may be better before you make a payment.
If you pay the creditors that have agreed to your full and final offer but you are still left with a large amount of debt because others haven’t, you may need to consider another debt solution.
If you decide to use an insolvency solution, such as a debt relief order (DRO), individual voluntary arrangement (IVA) or bankruptcy, any previous payments you have made to creditors will be looked at. If you have made full and final payments to only some of your creditors, it may be argued that this is a preferential payment and you have not dealt with your debts fairly.
If you apply for a DRO, it is possible that the DRO application will be refused or you may receive a debt relief restrictions order. See our Debt relief orders guide for more information.
If you were to apply for an IVA, it may affect whether a creditor agrees to the IVA proposal that would be put forward. See our Individual voluntary arrangements (IVA) guide for more information.
If you were to go bankrupt, it may be possible for the official receiver who handles the bankruptcy to reverse the full and final payment that you made and you may also receive a bankruptcy restriction order. See our Bankruptcy guide for more information.
If a friend or relative agrees and pays the settlement for you using their own money, this would not normally be classed as a preferential payment
If you are worried that a payment you are going to make could be a preferential payment, or think that a payment you have already made was preferential and want to apply for insolvency, contact us for advice.
Make sure the creditor agrees in writing to change your credit reference file details to show that the balance has been paid and the date this happened.
See our Credit reference agencies guide for more information.
Since April 2015 , if you are 55 or over, you may be able to take money from your pension fund to pay your debts. Creditors should not pressurise you to do this. Taking money from your pension fund early can have a big effect on your financial future. You may also have to pay tax on some of the money that you take. Your entitlement to benefits could change, both now and in the future.
If you are thinking about taking money from your pension, contact us for advice.
The Financial Conduct Authority (FCA) has issued rules and guidance in its Consumer Credit sourcebook (CONC) about settlement offers.
” If a firm accepts a customer’s offer to settle a debt, it must communicate formally and unequivocally that the offer accompanied by the relevant payment has been accepted as settlement of the customer’s liability.” Consumer Credit sourcebook (CONC) 7.14.14
You may have a lump sum that you need to divide up amongst several creditors. The usual way of doing this is to make ‘pro-rata’ offers.
This means that each creditor gets a fair share of the money you have available. The creditor you owe the most to will get the biggest share of the money and the creditor you owe the least to will get the smallest share.
Formula
Lump sum available x each debt
÷ the total amount you owe to your creditors
= offer to the creditor
You may have £10,000 owing to four creditors. You can raise a lump sum of £4,000.
£2,300 to Mastercard
£1,200 to a catalogue company
£4,500 to a loan company
£2,000 to the bank
Use the formula
Your offer to Mastercard is £920. You then do the same calculation for each creditor, using each individual debt in the calculation.
Your offers to your creditors should look something like the following table.
| Creditor | Column 2 | Column 3 |
| Mastercard | £2,300 | £920 |
| Catalogue | £1,200 | £480 |
| Loan | £4,500 | £1,800 |
| Bank | £2,000 | £800 |
| Total | £10,000 | £4000 |