Some debt solutions can take a number of months or years to clear what you owe – but a debt settlement offer (DSO) is a little different.
If you have access to a lump sum of money, a debt settlement offer is a way of paying off as much of your debt as possible in one large payment. Debt settlement offers are sometimes also known as “full and final settlement offers”.
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As with all debt solutions, a debt settlement offer (DSO) comes with pros and cons. We’ve put together a guide to these full and final settlement solutions so you can decide if it’s an option you’d like to explore. Remember though: your finances can have a huge impact on your life – so you should always seek professional debt advice if you’re not certain whether a debt solution will be suited to your needs.
What is a debt settlement offer?
A debt settlement offer is a way of paying off what you owe with a lump sum of money.
Your creditors (the companies you owe money to) may refer to this type of debt solution as a “partial settlement”, a “short settlement”, or a “full and final settlement”.
Full and final settlement is probably the most accurate way of describing how this kind of debt solution works. Your creditor agrees to accept less than the outstanding balance to clear your debt in full. Also, they agree that they will not take any further action to recover the rest of what is owed – making the agreement final.
How does a debt settlement offer (DSO) work?
You can suggest making a DSO to a company you owe money to. Alternatively, if you’ve been struggling with payments, a creditor may offer this kind of solution to you as a way of clearing the debt owed.
With a DSO, your creditor agrees to write off the debt after you’ve paid a lump sum towards what’s owed.
For example, if you owe a credit card company £5,000, but you’ve been struggling with payments, they may compromise and say that they will accept £3,500. They would expect this as lump sum payment, then write off the rest of what’s owed.
For you, this means a some of your debt is written off – and for the company you owe, they have recovered a large chunk of a debt that could otherwise take years to collect.
Can you include more than one creditor in a debt settlement offer?
Yes – you can. Since most people in the UK have more than one creditor, it’s worth understanding how a DSO works if you owe money to two or more companies.
As an example, let’s say you owe money to five different companies:
- Payday loan: £500
- Money owed to a friend or relative: £750
- Personal loan: £2,500
- Energy bill arrears: £250
- Credit card: £6,000
- Total amount owed = £10,000
Now, say you come into a lump sum of £8,000. It’s not enough money to pay off all your creditors in full – but each may accept a reduced offer, so that each debt owed is considered partially settled.
To be in with the best chance of settling each of your debts, you should pay each of your creditors a fair amount towards the full balance outstanding. To work this out, grab a calculator and use this calculation:
The amount of your lump sum multiplied (x) by what you owe that creditor then divided (÷) by your overall debt.
If we carry on the same example from above, your payments to your creditors work out like this:
- Payday loan: (8000 x 500) ÷ 10000 = 400 (you’d offer £400)
- Money owed to a friend: (8000 x 750) ÷ 10000 = 600 (you’d offer £600)
- Personal loan: (8000 x 2500) ÷ 10000 = 2000 (you’d offer £2,000)
- Energy bill arrears: (8000 x 250) ÷ 10000 = 200 (you’d offer £200)
- Credit card company: (8000 x 6000) ÷ 10000 = 4800 (you’d offer £4,800)
As long as the creditors agree to these reduced figures, it means the amount you owe is paid – with any remaining debt written off. Of course, you’d have to work out how much you owe and what your exact payments could be – but this gives you an idea of how to work out a fair amount of money for each creditor.
What happens if the debt settlement offer is rejected?
Your creditors don’t have to accept your offer of a reduced lump sum payment. If they don’t, you’ve got a couple of options.
Firstly, you could look at dividing your lump sum up a little differently. You don’t have to include all your debts – so you might find that you’re in a better position month-to-month if you just clear a big chunk of what you owe.
It might seem unfair prioritising certain debts, but if you do manage to clear just a few of your debts, it’s likely to free up money you can use towards debts with other creditors.
Alternatively, you may decide to look into an Individual Voluntary Arrangement (IVA) or – if you live in Scotland – a Trust Deed. Although IVAs and Trust Deeds usually involve making an affordable monthly payment, you can talk to insolvency practitioners about making a one-off payment instead.
How much debt can be written off with a debt settlement offer?
There’s no exact figure or amount of money that creditors will or will not accept when it comes to lump sum debt settlement plans.
Generally, creditors will look at the full amount you owe, what monthly payments you’ve been making, and any arrears you have – then they’ll make a decision about whether or not to accept the final settlement offer you’ve made.
It’s worth remembering that different creditors will be working within different guidelines, so some creditors may be happy to let you write off a large amount of debt, whereas others may not be willing to accept anything less than the full amount of money owed.
Will a debt settlement offer damage my credit score?
Initially talking to your creditors about a possible settlement won’t impact your credit score – but actually setting up a debt settlement will show up on your credit file.
Even though you’re paying your creditors off, a full and final settlement can damage your credit score in the same way bankruptcy can. This is because you’re only making a partial settlement – i.e. not paying your balance in full.
This means that you’re breaking the terms of the credit agreement that you signed when you took out your loan, credit card, or other types of debt.
Even though the creditors you’re paying off have accepted your offer, they are still required to inform credit referencing agencies that you’ve failed to pay off your debt in full.
The good news is anything negative that’s recorded on your credit file will only stay there for six years, and you’ll be able to start rebuilding your credit score as soon as your debts are settled.
Debt settlement offers: Pros and cons
Like other debt solutions, a full and final settlement offer has some advantages and some disadvantages – especially relating to your credit file.
We’ve covered most of these already, but we’ve summarised them here so you can see them all at a glance.
If you’re still not sure, you should seek professional debt advice to help you decide the best way to get free of debt.
Is a DSO right for you?
Your personal finances are unique – so it’s important that you seek professional debt advice tailored to your needs.
When you talk to our team, expert debt advice is exactly what you’ll get. We’ll talk to you about your current financial situation and tell you more about debt solutions that might help.
Remember, virtually everyone has money troubles at some stage in their life – so when you talk to our friendly advisers, you can be certain that you won’t face any judgement or criticism – just practical steps you can take towards a debt free life.
Advantages of using a Debt Settlement Offers
- Paying your debts off with a lump sum means you’re debt-free quickly
- You can put together a DSO yourself – you don’t necessarily need help from insolvency practitioners or a debt management company
- You could write off an amount of your debt
- Unlike bankruptcy or an IVA, your name will not be recorded on a public insolvency register
Disadvantages of using a Debt Settlement Offers
- Creditors don’t have to accept your offer. If they don’t, you might have to explore an IVA or Trust Deed instead
- Since different creditors will accept different amounts, you will have to work out how much money is needed to clear your debts. This can take a lot of time, effort, and negotiation
- Your debt with your creditors will only be ‘partially settled’, so your credit report is likely to be damaged. This will make it more difficult to get credit again in the future and will stay on your credit report for six years