A Guide to Full & Final Settlement offers

In a Full and Final Settlement (F&F) a creditor agrees:

1. to accept less than the whole amount to clear it (“full”), and
2. that they won’t take action to recover the rest (“final”).

This is sometimes called a “partial settlement” and sometimes a “short settlement”.

You can offer a F&F to a creditor. Or a creditor may write to you to suggest an F&F. This usually happens if you have defaulted on the debt or have been in a  debt management plan for a while.

You propose a Full and Final settlement

If you have a lump sum, then you can write to your creditors and offer a F&F.

You can do this yourself, there is no need to employ a solicitor to write a letter, that is no more likely to be accepted than an offer from you.

Where could the money come from?

The lump sum could come from:

• a refund that you get, for example from an affordability claim;
• a redundancy payment (make sure you will still have enough money to live on and pay the mortgage until you find another job);
• selling some assets, possibly even your house;
• an inheritance;
• it might be offered by a relative (do consider if your relative can really afford this – if your situation is close to hopeless, then it may be better to go bankrupt rather than take money from a relative); or
• if you are over 55, you might consider taking money from your pension if you can get your creditors to agree a low enough settlement.

It is usually a big mistake to try to borrow money in order to clear a debt that has already defaulted.

You don’t have to offer the same to all your creditors

If you don’t have a lot of money, it could be a good idea to use it to pay off one creditor.

For example, if you only have £1,000 then that isn’t going to get far if your debts add up to £24,000. But if you could get a creditor you owe £3,000 to take £1,000 then this is a good improvement.

When is an offer likely to be accepted?

A full and final offer is NOT LIKELY to be accepted unless you have already defaulted on your debts.

The longer you have been paying little or nothing towards them, the lower offer your creditors may be prepared to accept. I looked at this problem in Is it too soon for have good settlement offers?

How to make the offer

National Debtline has a sample letter that you can use.

It is a good idea to add an explanation about where the money is coming from.

A couple of examples:

 “I have been offered £2,000 by my sister if this will help me clear my debt with you, which is currently about £4,650. “

“I am reluctant to take money from my pension, so I will only do this if you agree to accept this offer.”

Enclosing an income & expenditure sheet with your letter will make the point to the creditor that if they don’t accept this offer it will take a very long while to repay the debt.

That sample letter asks the creditor to confirm in writing that the money will be accepted as a Full & Final Settlement and also that they will not sell the remaining debt.

You need to insist on this. Unscrupulous creditors have been known to just take the money, reduce the debt then continue to chase you for the rest of it. In 2023, this is very rare but it’s simply not worth the risk! If a creditor calls you up and agrees to your offer, do not pay the money without a written agreement.

When you are in a debt management plan

A F&F can be great way to start getting the number of debts down in a Debt Management Plan. the remaining debts will then be paid off faster

Often your DMP company will say you have to offer the same to everyone, which is normally not going to work well unless you have a lot of money to offer.

So I suggest you don’t talk to your DMP firm about this but make the offer to some creditors yourself.

I don’t think this is being unfair to your other creditors – by clearing one debt, your DMP will then start paying more to the others.

An unusual case – a single payment IVA

If you have a lump sum to pay towards your debts but afterwards you are unlikely to be able to pay much at all on a monthly basis, then this could be a good option for you.

A typical situation might be if you have been made redundant and you are unlikely to be able to work again, perhaps because of your age or health. Or if you have downsized your house.

This gives you a Full & Final settlement on all your debts without having to negotiate with each creditor individually.

The downside is that this is a form of insolvency – it has the same bad effect on your credit record as bankruptcy for 6 years.

If you want advice on this, talk to StepChange, who could set one up and who will explain if you have better options.

Before making an offer…

Is the debt enforceable in court?

Think about this before making a settlement offer.

For loans, credit cards, store cards and catalogues, the debts are unenforceable in court if the current creditor (usually a debt collector) can’t produce the CCA agreement for the debt. See When and how to ask a creditor for the CCA agreement for more details.

This is most likely to work for old debts, especially those where the account was opened before April 2007. It’s also worth doing this for accounts that were opened more recently if they have been sold to a debt collector. It won’t work for overdrafts or mobile or utility bills.

If the creditor admits they can’t produce the CCA agreement, you could decide not to pay the debt at all. This is normally your best option.

You may think that the creditor will then accept a really low settlement offer. Unfortunately many don’t.  completely sorted.

How low an offer will be accepted?

This is a really hard question to answer because it depends a lot on your circumstances. An offer may be rejected because it is too low, but if you give the creditor more information it’s possible that they could be persuaded if you can give them more information.

You have to put yourself in the mind of the creditor and try to work out what they will think – for more details read What to do if a Full & Final Offer Is Rejected.

For example, if you have been paying token payments for more than a year and your brother offers you half the amount you owe, then there is a good chance your creditors might be interested.

But if you have just lost your job, are young and healthy and have only missed a month’s payment, then your creditors are very unlikely to accept 50%… but you may be able to persuade them with 90%.

It isn’t good tactics to always start with a really low offer such as 10% if all the indications are that they won’t accept that. Your letter may just be binned if it isn’t somewhere close.

Realistically, a secured creditor is extremely unlikely to accept a low F&F if there is much equity in your property. And they are uncommon on debts where there is a CCJ.

Your creditor proposes a F&F

If you have been in a DMP for a while, or have not been paying anything, then you may receive a letter offering you a Full & Final settlement.

Klarna has said that it will offer 50% reductions to eligible customers who have missed payments for a long period.

Of course you may have no money to accept this offer… But if the offer is a good one it may be worthwhile taking a hard look at your situation (see the list of possible money sources above) to see if you have any options.

At this point it may be a good idea to negotiate, but there is no point in wasting everyone’s time. If they have offered you a 60% settlement, then it’s worth seeing if they will accept 40%, but not 10%.

Read their letter closely – is it clear that they are definitely writing off the remainder of the debt? If you are unsure, get them to clarify this in writing.

Your credit record & worries about a future mortgage

Debt collectors tell you that a partial settlement will harm your credit record and it will be there for 6 more years.  The first is partly true – but often doesn’t matter – and the latter is simply wrong!

• A F&F usually results in the debt being marked as “partially settled” on your credit file.  You may decide this isn’t important for you. Your credit rating is usually poor or dreadful if you are likely to get a F&F, and it’s sensible to decide that clearing your debts is your top priority. Whilst it would be lovely to get rid of the debts and improve your credit record at the same time, that probably isn’t going to happen.
• If the debt has a default date on your credit record,  it will always drop off your credit file six years after that date. Making a Full and Final settlement will not affect this, the debt won’t stay there for longer.
• If the debt has already dropped off your credit record it will NOT reappear after a partial settlement.

This is discussed in more detail in How partial settlements affect your credit rating.

You may be worried about a future mortgage. I have looked at this here: Will partial settlement make it hard to get a mortgage?

For most people if they have to pay in full it will be many more years before they can get a mortgage… so unless you can easily pay the full amount, this probably isn’t something to worry too much about.

Summary of pros and cons

Pros    Clears a chunk of your debts, leaving you in a better position to clear the rest faster.
Cons    Your creditors don’t have to accept. You shouldn’t leave yourself short of money you need for living on. The debt will be marked as ‘partially settled’ on your credit file.
Debt Camel says Often you don’t have the money for a F&F, so they tend to be rare, but they are good options when they work for you.

Remember to keep the emails or letters

99 times out of a hundred, everything goes smoothly and you will never hear anything about the debt again after a F&F.

However just in case something goes wrong – perhaps your debt which is closed gets accidentally included in a lot of debts the creditor is selling to a debt collection agency – it’s a good idea to keep the emails or letters from the creditor confirming that your payment was a Full and Final settlement.

If you ever get any letters about the debt again, send them a copy of the letter or email where the creditor agreed to the settlement or proposed it.  Keep these letters for at least six years, after which the debt would become statute-barred anyway.