A reader asked what she should do as her reasonable Full & Final settlement offer had been rejected.
It’s going to seem obvious, but the creditor rejected the offer because it didn’t seem reasonable to them.
You may think “I paid off the amount I borrowed ages ago, their interest is too high” or “They probably bought this debt for pennies, so they should be happy to accept 20%” but that’s not the way your creditors think. They are running a business which means they want to get the most money that they can from you.
When your F&F has been refused, you need to look at your offer through the eyes of your creditor and think why they would have rejected it.
You can use that to decide what to do next.
Why was it rejected?
Your creditor thinks you can pay more each month
You may know you can’t but you have to prove this, not just say it.
Do enclose an Income & Expenditure statement with a settlement offer, then the creditor can see your full situation. This calculator has an option to download a version to send to your creditors. It also converts things from weekly or annual to monthly and suggests some expenses you may forget about as you don’t pay them every month.
If your health is poor, think about enclosing some information about this – say a copy of a hospital appointment. It’s all evidence about your situation.
If your only income is from benefits, enclose a letter about your Universal Credit, disability benefit or Pension Credit to prove this.
Also mention any priority debts such as energy bills, council tax or rent. But really if you have any priority debts you should be using any spare money you have to clear those, your non priority debts can wait.
It’s too soon for this offer
If you have just lost your job, you may know that you won’t be able to find another one at the same money and your situation is just going to get worse. But creditors will rarely accept F&F offers before you have defaulted on your debts.
When you have only missed a few payments they are unlikely to accept a low F&F. Here is a reader asking about his case, and my reply.
At that point your creditor will have realised that you were serious and that you really do have difficulties.
The debt is still with the original lender
This is a variation on “it’s too soon”. A debt collector that has purchased your debt will not have paid much for it. So they are MUCH more likely to accept a F&F offer than the original lender.
Here you normally just have to carry on with the low monthly payments (or set up a payment arrangement if you haven’t yet done this.)
People often hate the idea of their debt being sold to a debt collector, but it’s often a good thing. The sooner the debt is defaulted and then sold to a debt collector, the sooner a F&F may be accepted.
It’s not high enough
This partly depends on how long you have been making no or reduced payments. The longer the time, the more likely your creditors are to accept a low offer.
How large are your monthly payments? If the full debt will be repaid in 3 or 4 years, then your creditor isn’t likely to accept a 20% F&F.
When the debt is secured on your house, a creditor is unlikely to accept a low offer.
One option here is to make a larger offer to one or two creditors. So if all your creditors refuse a 30% offer, then you could consider offering a couple of them 50%. Clearing some debts will mean you can repay the rest faster.
It’s not clear where the money is coming from
If the money for the F&F offer is coming from a “one-off” source – perhaps you have had an affordability refund or redundancy pay or a bonus – then explain this. Then your creditor will realise they may as well accept as there isn’t going to be any more on offer.
When the money is a gift, explain this. For example, “I am being offered this money by my brother if I can use it to settle this debt”.
NB Using redundancy pay to clear debts may not be a good idea, see 4 steps to take if you lose your job. Think about delaying your settlement offer until you have found a new job.
They know you have assets
Your bank may know a lot about your finances. And another creditor may have looked in some detail and know you own a house with equity. That doesn’t mean they will never accept a F&F, but it is unlikely that they will accept a really low one.
It is rare for a creditor to accept a partial settlement on a secured loan. Even if you have negative equity, many secured lenders or creditors who have got a charge on your house will reject an offer.
What should you do now?
How can you get the F&F accepted?
Your settlement options come down to some combination of:
- repeating your offer with more information about your situation and/or where the money for the offer is coming from;
- offering more to a few creditors rather than a little bit to a lot of creditors; or
- waiting a while then repeating your offer. Especially if the debt hasn’t yet been sold to a debt collector.
You may have wanted to get this debt settled, but it’s a bad mistake to offer more if it’s not affordable.
Don’t ever borrow money and pay interest to make a settlement offer. You may think 50% off is great, but if you take on a new loan it’s probably going to be at high interest because of your current debt problems… Repaying a defaulted debt will NOT improve your credit score. And most defaulted debts have interest frozen. So don’t turn an old problem into a new one.
Even if you can borrow the money from family at 0% interest, think about your other options first.
Other possibilities – may be better!
If this is a loan, credit card or catalogue, think about asking the creditor to produce the CCA agreement for the debt. This is MUCH more likely to work if the debt has been sold to a debt collector. Sold more than once – even more likely. Very old – even more likely.
Was the original debt unaffordable? See the article for the type of debt for an explanation.
Here your complaint goes to the original creditor and they will then sort out the debt with the debt collector if it has been sold. If you win an affordability complaint, either directly with the lender or at the Financial Ombudsman (many lenders reject good complaints!) the default will be removed from your credit record too.
If you have been making very low payments for years and that won’t change, because of your age or health, it may be better to ask for a write-off.
You may qualify for a Debt Relief Order which would clear this debt and other problems such as arrears on bills. Talk to a debt adviser about this.