How can I offer my creditors a Debt Settlement Offer?
A Debt Settlement Order (DSO), or a ‘Full and Final’ Settlement, is a debt solution that involves you negotiating with your creditors in order to offer them one, lump sum payment to settle your remaining debt. This is usually initiated, requested and negotiated entirely by you, so it is very important that you get advice about how to offer your creditors a DSO.
- Be certain you have access to the lump sum
If you’ve been told you are getting an inheritance, a family member has mentioned they are happy to give you an amount to settle your debts or any other windfall, you must make sure this amount of money is definite before you get your creditors involved; after all your inheritance may be less than you thought, or your family member may change their mind. Only once you have a firm commitment, or, preferably, have the money set aside, should you make an offer to your creditors.
- Contact your Creditors
Now that you are ready to contact your creditors, there are many important factors to consider about your letter:
- Explain your circumstances: Why can’t you pay your debt? Why won’t this change?
- Make it clear the lump sum is available for a limited period of time. For example, that a friend is only willing to give you the money now, or that you will be forced to use it as expenditure if they do not accept the offer.
- Make it clear that the payment will only be made once the offer is accepted in writing.
If you have multiple creditors you will also need to calculate how much to offer each of them. To do this, the formula is:
(Amount owed to single creditor ÷ total debt) × Lump sum amount = Amount to offer the creditor
Demonstrate your calculations to all your creditors and add this to your letter.
- If some of your creditors refuse, contact them again
If most of your creditors agree, then it is worth contacting those who refused asking them to reconsider in light of all the other creditors’ agreement. Depending on why they refused it might be useful:
- To offer more information about your situation if they think you can afford monthly payments, or they aren’t aware how you are getting the lump sum.
- To wait before repeating the offer if you have never missed a payment or have only recently lost your job. They might need more proof that your situation is not going to improve.
- To offer a new, higher amount to less creditors if one or more think the settlement offer is too small. For example, instead of splitting £10,000 between 6 creditors so they get 30% of their debt, use it to settle your debt with 5 of your creditors so they get 50% of their debt. You will still have to pay the final debt.
It is also worth exploring other debt solution options to see if they are preferable to the new terms you are offering. For example, having an IVA, which will solve all your debts through 6 years of manageable payments based on your surplus income before having the remainder written off, might suit your circumstances better than using a lump sum payment to settle 4 debts, while still having payments to 3 creditors for another 10 years.
- Gain acceptance of all terms in writing
Once you and your creditors have come to an agreement, you must make sure all the terms and both your and their agreement is in writing. Your creditor may call you once they receive your offer and discuss the matter over the phone, but any agreement made in this way will be difficult to prove if there are any disputes. It is very important that you don’t send any payment until the terms are confirmed.
Your terms should include:
- The agreed lump sum payment amount
- Your debt written off when the agreed lump sum amount is received
- Your credit reference to be updated to reflect that the balance has been paid
If the lump sum is particularly large, it may be worthwhile to hire a solicitor to write a formal agreement for your peace of mind and security.
- Pay your Creditors
Paying your creditors should be fairly straight forward – do it as soon as possible in case your creditor changes their mind, or uses it as an excuse to end the agreement. If possible, offer the money through a third person transfer, as the involvement of a third party helps to make the offer legally binding.
Find out more about the DSO process here.