Full and final settlement offers (Scotland)

This fact sheet 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 fact sheet to:

• understand how your credit reference file will be affected;
• work out suitable offers to your creditors; and
• help you to write a letter making the offer.

This fact sheet includes an example calculation to show you how to work out your own offers. The sample letter mentioned in this fact sheet can be filled in on our website.

Full and final settlement offers

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.

Debt Arrangement Scheme (DAS)

If you have already entered into a debt payment programme (DPP) under the Debt Arrangement Scheme (DAS), contact your approved money adviser to discuss the possibility of making an offer in full and final settlement to creditors included in the DPP. The money adviser may be able to ask the creditors to agree to a composition (that is, a partial write off of the debt). If this is accepted, the money adviser will contact the Office of the Accountant in Bankruptcy (who administers the scheme) to seek an early end to your DPP. See our Debt Arrangement Scheme fact sheet for more information.

Do you have priority debts?

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:

• rent or mortgage arrears and your landlord/lender is threatening eviction action;
• council tax arrears; or
• gas or electric arrears and your supplier has threatened to install a prepayment meter or to disconnect you.

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.

Do you have a deficit budget sheet?

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 the deficit is fairly small and you are able to take steps to balance your budget sheet, then a full and final settlement may still be a good solution.
• If the deficit is large, it would be better to use your lump sum to help balance your budget sheet. This will stop you falling behind on payments to your priority creditors.

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.

Preferential payments

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 trust deed 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 were to apply for a trust deed, it may affect whether a creditor agrees to the trust deed proposal that would be put forward. It may also be possible for the trustee who handles the trust deed to reverse the full and final payment that you made. See our Trust Deed fact sheet 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 fact sheet 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.

Making an offer

• You can use the sample letter Full and final settlement offer to make full and final offers to your creditors.
• It is very important to make sure the creditor accepts your full and final settlement offer in writing. Make sure you keep a copy in case there is a dispute. This could happen years later and you may need the letter as proof.
• Never send a lump-sum payment before the offer is accepted.
• A friend or relative may be able to give you the money and make the payment. It helps your agreement to be more legally binding if the creditor accepts the money from a third party.
• If you are settling a debt that is large or particularly important, you could have a formal agreement drawn up by a solicitor and signed by you and the creditor. This is not normally necessary.
• Make sure you keep copies of any letters you send and receive.

Credit reference file

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.

• Check this has been done by asking the credit reference agencies for a copy of your credit file.
• You can expect to see your account showing as having been closed.
• Your balance should change to ‘zero’ to show that there is no more money due.
• Credit reference agencies may mark the account with a ‘P flag’ for ‘partial settlement’ which means that you have made a part-payment and not paid the balance in full.

See our Credit reference agencies fact sheet for more information.

Should I use my pension?

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.

How to work out offers

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.

• Find out the exact balance you owe to each creditor.
• Use the formula to work out how much to offer to each creditor.
• Use the example later in this fact sheet to help you.
• Send the offers to all your creditors along with a table setting out how you have worked the offers out. It is helpful if creditors can see that they are all receiving an offer of a pro-rota settlement; then they know they are all being treated fairly.
• If some of the creditors refuse, then write to them again and ask them to reconsider. Tell them if any of your other creditors have accepted the offer and explain your circumstances again. If your creditors still refuse, contact us for advice to see what other options you may have.

Creditors must treat you fairly

The Financial Conduct Authority (FCA) has issued rules and guidance in its Consumer Credit sourcebook (CONC) about settlement offers. The FCA says:

'' 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.

        > **Formula**  

Lump sum available x each debt
÷ the total amount you owe to your creditors
= offer to the creditor

Example

You may have £10,000 owing to four creditors. You can raise a lump sum of £4,000.

You owe:

£2,300 to Mastercard

£1,200 to a catalogue company

£4,500 to a loan company

£2,000 to the bank

Use the formula

• £4,000 (lump sum available) X £2,300 (debt to Mastercard)

• ÷ £10,000 (the total amount you owe to your creditors)

• = £920 (offer to Mastercard)

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.

Offers to creditors based on a full and final settlement of £4,000

Creditor	Column 2	Column 3
Mastercard	£2,300	£920
Catalogue	£1,200	£480
Loan	£4,500	£1800
Bank	£2,000	£800
Total	£10,000	£4000

Other fact sheets that may help you

Bankruptcy fact sheet

Credit reference agencies fact sheet

Trust fund fact sheet