It is a sad fact that circumstances can take a turn for the worse and what was once a manageable level of debt could soon become a real burden. This is true for business owners and in an individual’s personal life. If this happens to you, it may be possible to negotiate with the people you owe money to.
Making a settlement offer to creditors is just one way in which you can try to bring your debts back under control. They can be especially popular because they remove the need to make regular monthly payments and instead focus on clearing as much of the debt as possible in one go.
What is a Settlement Offer?
A Debt Settlement Order (also known as a Full and Final Settlement), is a form of debt solution that involves negotiating with your creditors to pay them one lump sum to settle your remaining debt.
Usually, making a settlement offer to creditors will involve you asking them to accept an amount that is actually lower than the total amount you owe. The payoff for this is that they will receive a large lump sum instead of regular instalments that may dry up further down the line.
The negotiations will almost entirely be carried out by yourself, so it is a good idea to seek specialist assistance beforehand to give you the best possible chance of success.
Advantages & Disadvantages of Making a Settlement Offer to Creditors
Making settlement offers to creditors can be extremely beneficial since they can reduce the overall amount that you will have to repay, assuming of course your request is accepted. They will also involve lower amounts than you’d repay if your financial products ran for the full term, since you would receive a refund of interest.
The major downside of settlement orders is that you will need to have either saved up or acquired a lump some of money to even attempt it – something that is just not possible for some people. There is also the possibility that your creditors will refuse your offer to try and obtain the full amount you owe.
Key Information about Making Settlement Offers to Creditors
If you are thinking about negotiating a settlement order, it is a good idea to seek expert advice beforehand to see if this is the best course of action for you, or if other alternatives are available. For cases where a settlement offer is the most appropriate, we have put together some handy tips and tricks to help you along your way.
Be Certain you Have the Money
This may seem too obvious, but it is important that you have the funds safe in your account before making a settlement offer to creditors. Whether the money comes from an inheritance, financial assistance from family members or any other source, it is essential that the amount of money is definite before you start involving the people you owe money to.
While the temptation may be strong to commence negotiations as soon as the prospect of a lump some arises, there may be a change in circumstances that means you end up with less money than you anticipated – leaving you with a set of promises that you are no longer able to keep. Examples of this include an inheritance turning out be less than you imagined, or the person who promised you the funds is no longer able to help.
As such, you should only start approaching your creditors when you have the money set aside and secure.
Start the Negotiations
Now that you are ready to get in touch with your creditors and have decided how much you want to offer them, you will first of all need to send them a debt settlement proposal letter. This will outline the figure you are offering to pay and when you can do this by.
Your letter should also explain why you are unable to settle the debt in full and make it clear that it is a limited time only offer. It is also important that you specify your offer must be accepted in writing and ensure you keep proof of postage (ideally send it tracked too) so you have a record of when your correspondence was sent.
Another essential tip is that you ensure every single correspondence you make is in writing and keep records of these for around six years. This is so that you are covered in case your creditors renege on their agreement and either claim they didn’t consent to the settlement offer, or try to chase you for the remainder of the debt further down the line.
Dealing with Multiple Creditors
You may find that you have more than one creditor that you want to send a settlement offer to. In this case, it is important that you first of all work out how much you want to send to each party. After all, you must be sure that you are making everyone a fair offer.
The creditor that you owe the most amount of money to should naturally be offered the largest share and so on – a process known as a pro-rata offer. As part of this offer, it is important to be honest to your creditors about how much of your settlement request they are each going to receive.
To calculate how much each creditor should receive, you can use the following formulae: (Amount owed to single creditor ÷ total debt amount) x lump sum amount as a starting point. However, this calculation should not be considered an alternative to seeking professional advice.
Be sure to include all of your calculations in a table to ensure that all of your creditors get a clear idea of how much they will be receiving.
Coping with Rejection
Unfortunately, you may find that some of your creditors will not be happy with your proposal. This could lead to you setting up a separate solution to repay your debt to them, or amend your original offer if possible.
It is also worth exploring some other debt solution options to see if they are more agreeable for your creditors. Examples of this include Individual Voluntary Arrangements (IVAs) or a Debt Relief Order (DRO).
Effect on your Credit File
If your creditors accept your settlement offer, your debt will be marked as ‘partially settled’ on your credit file. Most credit reference agencies will use a flag featuring the letter P to show this. The balance left on the debt will also be shown as zero to demonstrate that nothing else is owed.
This will be seen by other creditors and potential lenders and could sway their decision on whether they want to provide you with additional funds. This is because ‘partially settled’ means you were unable to pay the full amount you owed.
After a period of six years, the credit note will be removed from your file and should not affect your rating any more.
Get Expert Advice
If you are struggling to satisfy your obligations, either as an individual or a business owner, it is essential that you seek specialist advice at the earliest possible opportunity. This is where Inquesta can help.
We have amassed decades of experience in assisting people from all areas of industry in resolving their financial difficulties in a manner that best suits them. We’ll carry out a thorough investigation into your individual circumstances and recommend what we believe to be the best solution for you.
Whether it is coming up with tax debts solutions, opinions on solvency or organising a debt management plan, we are perfectly placed to help. For more information, contact our team today or set up a free consultation.