Full & Final Settlement Offers

Overview

A full and final settlement agreement is a way of giving an agreed lump sum payment to a creditor against the full balance of a debt. The remaining balance will then be written off.

You may have come into some money, have savings and want to use it to clear your debts or a third party may have offered to clear it for you. You should advise the creditor, when a third party is offering money, that they will not make the payment until the offer is accepted and that the availability of the money will only be available for a limited time.

Where your situation is such that you have been unable to make regular repayments and your circumstances are unlikely to significantly improve, this is an option to clear your debt if funds allow. You should also explain this to your creditor.

Communication

When you communicate to creditors proposing a full and final settlement it is sensible to put it in writing. It is also important to ask the creditor to accept in writing. If there is a dispute later, as to what has been agreed, it is easier to prove if you have it documented. It is essential that you keep a copy in case there is a dispute, which could occur many years later. You should always receive written confirmation and acceptance of your offer before you send a lump-sum payment.

It's important to include any information that explains why a full and final settlement would be helpful to your situation and why creditors should consider accepting, if you have a health issue or long-term income shock for example.

Treating Customers Fairly

In relation to full and final settlement offers the Financial Conduct Authority (FCA) has issued rules and guidance in its Consumer Credit sourcebook (CONC).

The rules and guidance state:

'' 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

Credit reference files

It is very important, as part of the agreement, when you propose your offer, to request that the creditor marks your credit file as fully satisfied. Otherwise it is possible that you are chased for the remaining balance at a later date. This can cause problems especially if you have not kept a written copy of the acceptance of your agreement.

You should also obtain copies of your credit reference files afterwards to check they have fulfilled their agreement. Your account should be shown as closed and the balance amount changed to zero. If your account has been marked with a P flag (partially settled). This means they have accepted your payment as a partial settlement and may pursue you at a later date.

Pension Fund

It is possible, if you are 55 or over to access your pension fund and use your money for debts.

Creditors should not put any pressure on you to do this, as taking money from your pension fund early can impose financial complications for you in the future. In addition you may have to pay tax on some of the money you take. Your entitlement to benefits could also be impacted, both now and in the future. You should get advice from a regulated independent financial adviser before taking decisions about your pension.

Offers to Creditors

If you have a lump sum you want to use for several creditors, as a full and final settlement, the usual way is to make ‘pro-rata’ offers. This means that the creditor who is owed the most will receive the biggest share and the one you owe the least to, will receive the lowest share. In order to calculate fairly you need to obtain the exact balance from each creditor.

Use the formula below to determine how much to offer each creditor.

You should then send the offers to each of your creditors. It is beneficial for creditors to see they are all receiving a fair pro-rata proposal. It is also helpful to inform them when other creditors have accepted.

If your proposals are not successful you may need to seek further advice and consider a different strategy or option in dealing with your debts.

Formula

Lump sum available X each debt

÷ the total amount you owe to your creditors

= offer to the creditor

Example

You may have £20,000 owing to four creditors and a lump sum of £8,000.

You owe:

£4,600 to bank a

£2,400 to a catalogue company

£9,000 to a loan company

£4,000 to bank b

Use the formula

£8,000 (lump sum available) X £4,600 (debt to bank a)

÷ £20,000 (the total amount you owe to your creditors)

= £1840 (offer to bank a)

Your offer to bank a is £1840. You then do the same calculation for each creditor, using each individual debt in the calculation.

Managing your expectations

Your creditors do not have to accept full and final settlement offers, especially where you hold assets, such as a property with equity, that exceed your debt liability. You could also be left in a position where some creditors accept and others don't, this may mean that you need debt advice and a debt solution.