What is a Debt Settlement Offer (DSO)?
A Debt Settlement Offer (DSO) is a debt solution that allows you to repay what you owe with a lump sum payment. This is often also referred to as a full and final settlement offer.
If you find yourself with a financial windfall such as an inheritance or money from a friend or relative, using the lump sum to make a DSO could be a viable way to clear your debts.
These may include:
- Money from compensation
- The sale of an asset
- Pension if you’re over 55 could also be included.
By making a DSO, you’re offering your creditors the chance to recoup a portion of what you owe upfront, rather than waiting for you to repay the amount you owe over an extended period of time, using monthly payments for example. This is particularly useful if it’s unlikely you will ever be able to repay the total amount you owe.
How does a DSO work?
When you’re in debt to multiple creditors the ideal scenario is to repay the total amount you owe and become entirely debt-free.
When that’s not possible, the next best thing is a partial settlement of the debt.
A DSO enables you to use a lump sum to clear your debts, even if the lump sum payment is less than your total debt. As long as creditors accept your offer – i.e. agree to a sum of money in the settlement offer – they will accept partial settlement of your debt in exchange for writing off the remaining amount owed to them.
If the settlement offer is big enough, the money will be shared equally among all of your creditors. If there isn’t enough money involved to cover this, you can use the lump sum to settle specific debts.
Can I negotiate a debt settlement myself?
If you have access to a lump sum, it is possible for you to reach out to your creditors and negotiate a debt settlement directly.
If your debt owed relates to credit cards, for example, credit card companies are obliged to deal with you, and there is no guarantee that industry experts or professional debt negotiators will be able to get a better deal than you.
That said, there are debt charities and debt advice companies who may be able to help.
Even if you’d prefer to handle your DSO yourself, it’s a good idea to at least seek debt advice before offering creditors a sum of money.
What is a reasonable full and final settlement offer?
If you are using a ‘windfall’ to create a DSO, you must calculate how much money to offer.
Ultimately, a ‘reasonable’ amount to offer, as a full and final settlement, is whatever your creditors are willing to accept.
The exact amount depends on various factors, including who your creditors are, how big of a ‘windfall’ sum you have, and also your chances of being able to pay off the full amount over time.
You won’t be able to offer the full amount in your settlement, but you should offer as close to the full amount as you can afford.
By agreeing to a settlement offer, your creditors are accepting a loss on your debts- the closer the offer is to the total amount you owe, the more likely each creditor will be to accept your offer.
What percentage should I offer to settle debt to multiple creditors?
If you owe money to several creditors, it’s possible to pay with one lump sum if they all agree.
To achieve this, you’d make a pro-rata offer, which involves dividing the lump sum amount between creditors in proportion to what you owe.
The process of arranging a DSO with multiple creditors is much the same as if you’re only paying one, however, you’ll need to work out how much of the lump sum to offer each creditor.
Here’s how it’s calculated:
- Multiply the lump sum by the exact individual debt owed to one creditor.
- Divide this by the amount you owe to all creditors
- The total is the amount to offer to that creditor
What happens if a Debt Settlement Offer is rejected?
If your application for a DSO is rejected you could try using the money you have acquired to apply for an IVA if you’re a resident of England, Wales or Northern Ireland, or a trust deed if you live in Scotland.
With either of these options, you could agree to clear what you owe using a one-off payment, rather than paying monthly.
Does a DSO harm your credit score?
A DSO is similar to most debt solutions in that it will remain on your credit file and impact your credit score.
The reason is that you are agreeing to a partial settlement, rather than fully clearing your debts.
A DSO will appear on your credit file as your debt being ‘partially settled’. This may seem strange given your creditors have accepted the offer, and agreed to clear the balance of what you owe them. Unfortunately, creditors agreeing to write off your debts is not the same as repaying them in full. While using a DSO means you will no longer be liable for the debts covered by the agreement, future lenders can access your information and see the debt owed wasn’t repaid in full.
This will appear on your credit file for six years.
Should I enter into a Debt Settlement Offer?
As with every solution, a DSO comes with pros and cons.
On the plus side, using a lump sum to make a debt settlement means you will no longer be responsible for the debts included in the agreement, and you won’t be beholden to your creditors. On the other hand, a debt settlement isn’t viewed in the same way as repaying your debts in full and will therefore have an impact on your credit score.
If you’re struggling with your debts and are wondering whether a DSO is the appropriate debt solution for you, talk to a one of our debt advisers on 02895 380906. Our advisers will listen to your circumstances, gauge your situation, and provide you with full comprehensive debt advice to assist you on your journey to clear outstanding debts.
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We work closely with several local debt charities including adviceni.com and ruralsupport.org.uk providing training and support. Linda Wilson, our Voluntary Sector Services Manager, works closely to ensure that our services are accessible to those most in need.