Letters To Creditors - The Third Step

Creditors will sometimes accept a lower lump sum in 'full and final settlement' of a debt. Here's how to ask.

One of the most important things we recommend when it comes to debt is keeping in touch with your creditors. So, in Letters to Creditors - Part One we suggested a sample letter for you to use when asking creditors to accept lower payments and freeze interest and charges. Part Two offered a follow-up letter to use if they refused.

But what happens if the debt is simply too much to manage over the long term or a debt collection agency has taken on your debt and you just want to get them off your back forever? If you have a lump sum in savings or you can get hold of some money by selling a major item or falling on the mercy of a generous relative, it is possible to make an offer of a 'full and final settlement'.

This means that you offer to pay of a sizeable proportion of the debt on condition they write off the remainder. The reason collection agencies might accept this is because they 'bought' your debt off your original lender at a discount or your lender is prepared to accept a lump sum from you as an alternative to putting up with token monthly payments for years on end.

You will usually need to find around half of the amount you owe but according to the Consumer Credit Counselling Service, some companies accept as little as 35% of the debt owed. If you need to pay off several creditors then divide the money between them on a 'pro-rata' basis to ensure that each creditor gets a fair share of the money available.

One very important thing is never ever send any payment with your letter -- always get an agreement to settle in writing before you hand over any money, otherwise they could simply bank the cheque and continue pursuing you for the balance. The fact that they've cashed it does not necessarily mean they've accepted it as full and final settlement.

Anyway, here's a sample letter for you to use:

Dear Sir/Madam

Without Prejudice

RE: Grabbit & Run Credit Card - Account Number:123456789

I write with reference to the money owed on the above account.

Unfortunately, I am unable to pay you the amount I owe in full because... give brief details of what has led to your problems ie: losing a job, relationship breakdown, ill health.

However, I can raise £xxx and would like to offer you this sum on the strict understanding that it is in full and final settlement of my debt and that neither you nor any associate company will take any further action to pursue this debt in any way whatsoever and that I will be released from any liability.

I also request that, if accepted, you will mark any entry on a credit reference agency file relating to the above account as "satisfied" in full.

I hope you will consider this to be fair and responsible settlement and on receipt of your signed acceptance, I will make arrangements for payment within the next 14 days.

Remember it is vital, if they accept, that you get their agreement to cancel the remaining debt in writing as disputes can happen years later. And, make sure they also agree to contact the credit reference agencies to amend your files to show the debt has been 'satisfied'. You can check this has been done later by asking the credit reference agencies for copies of your credit file.