Offering a lump sum DIY debt solution

Summary: Offering a lump sum - This paper looks at negotiating with creditors in order to settle a debt at less than the value of the debt.

Creditor expectations

All creditors will expect you to repay debts according to the contractual arrangements in place when the credit was taken out. However, with the best will in the world, no-one can predict the future and it may be that we find ourselves unable to honour the agreement. Redundancies, relationship split, illness, increased expenditure, loss of overtime are all possible reasons for a problem we didn't anticipate.

Priority payments

Some of us, with very honourable intentions, simply ensure all credit is repaid contractually, but then find ourselves unable to meet essential living costs. Mortgage or rent falls into arrears, council tax is unpaid or we can only meet such payments by taking out further credit. Mortgage or rent and council tax are priority obligations. We will very quickly find ourselves in serious trouble if we fail to maintain the payments or come to some agreement. However, drawing further credit is very unlikely to be the answer either. We are faced with a double whammy - paying out money we don't have whilst the overall debt is increasing.

Exploring options

Very probably we first need to explain our problem to our creditors. We may find that they give us a little time to sort something out. They would far rather know about the problem than not. Some token payment is likely to be looked on more favourably than no payment at all. Once we have found ourselves making reduced or no payments, and especially if creditors feel we genuinely can't afford to make the repayments, they may be interested in settling the debt with a lump sum.

Settlement offers

Sometimes creditors will make an offer on a debt by writing to you. Pay now and we will accept 10% or more reduction. Obviously, lump sums to clear the debt appeal to creditors, especially if they are aware that the debtor is struggling to make repayments. Of course there is nothing automatic or guaranteed about this, and creditor responses may vary considerably. But there is nothing to lose and everything to gain from contacting individual creditors with an offer.

Finding the lump sum

For many of us such an option is a non-starter. But the lump sum that we might have thought is not enough to clear our debt maybe becomes an option if we can spread it over debts of a greater value. If we are in a position to release equity from a property it could be worth seeing how much debt we could clear with it. Or a low or no interest loan from family or friends could be used to offer settlement figures. If we phone/write to creditors explaining our circumstances with an overview of income and outgoings and other debts and a suggestion of how much we might be able to offer, we may meet with a favourable response.