In looking at options and solutions to get out of debt, for some settling a debt, or paying less than what is owed can be a solution.
There are two (2) caveats to this:
- You need the cash/money to pay the agreed settled amount, either in one lump sum payment, or in a couple of large payments.
- You usually need to be in arrears or have defaulted on the account.
One other issue may be if you have more than one creditor you owe. If you can only pay/settle one account, it does not get you out of debt. You still owe the other creditors.
And paying the creditor that shouts the loudest, is not the answer either.
An example may be this:
You owe £3,000 on a credit card, and £5,000 on a personal loan.
You are in arrears, or have defaulted on the accounts.
One option may come from the creditor themselves, they may send you a notice that they will consider the account paid in full, if you pay XXX amount.
The further in arrears you are, or if defaulted, in some instances the better the settlement offer may be.
You may owe £3,000, and the lender states they will settle the debt for £2,000, possibly less.
Settlements can be a good way to resolve your financial debt issues, but again you need the money in order to do this.
And don’t think by settling an account it will not show up on your credit history, as it will. The account may show a zero (0) balance, which is good, but it can also be reported as settled, agreed for a balance less than what is owed, or other comments to show the account paid for less than what was owed.
If you have more than two or three (3) creditors, and you want to offer settlements to clear he balances, it may prove difficult to get all the creditors on the same page.
And again you need the money.
Another example may be this:
- Credit card A: £3,000
- Credit Card B: £1,000
- Catalogues: £500
- Loan: £5,000
In total you owe £9,500, and you receive a windfall of money equating to £5,000.
In this instance you may wish to offer each creditor 50% of what you owe. It is offering an equatable distribution to all.
If you do suddenly find yourself with £5,000, but know you can afford to make large payments due to some other money coming in, you could offer the same 50% of the balances, but pay it over a two (2) or three (3) period; making 2 or 3 payments of what the 50% offering/settlement.
But again, you need the money, and you need to get all your creditors on the same page.
Full and Final Settlements
In some instances one way to get all your creditors on the same page is through a Full and Final Settlement via an IVA/Individual Voluntary Arrangement.
This is different than a standard IVA, where you make payments to your creditors for five (5) years, and after five years the remaining balances are written off.
In a Full and Final Settlement, an Insolvency Practitioner sends proposals to your creditors outlining the amounts they each will receive based on how much you have to offer, and the percentage of your debt each holds.
Again, it is to be an equitable amount to each creditor.
The creditors are allowed to vote on the settlement, and as long as the majority agree, it is binding to all creditors.
So in the above example where you had a loan of £5,000 with a bank, if that bank agrees to the settlement, as they hold the lion’s share of your debt, settlement would be binding to all creditors.
One thing to remember here in a Full and Final IVA, if you show and have the means to make payments each month, even after the agreed settlement amount, you will be expected to make payments each month for a period of time.
Why you may ask???
Your creditors want to minimise their loses, which if you can pay more into the balances, they will require you do so.
Again, settling an account for less than what is owed, can be an option to get out of debt, however, you need the money in order to make it happen.