Can I settle my unsecured debts for less than I owe?

The answer to this question may surprise you.

Yes you can settle almost all consumer debts without having to pay the full amount.

Perhaps the only benefit to consumers of the credit crunch that the banks have plunged us all into is th simple fact that the banks are desperate for cash.

They are so desperate that they would have something today than the promise of everything being paid in the future.

There are two main ways that you can settle your debts with your creditors.

1. By entering a debt management plan (known as a DMP) whereby all your debts are added together and one single low monthly payment is made to cover them all.

2. By making a Full and Final Settlement – in other words offering to pay a fixed lump sum in order to have the debt written off by your lender.

Both of the these options have been around for years. What you may not know is that you should not be paying someone to administer your debt management plan.

Debt Management Plans (DMP)

Be careful of any debt reduction companies who will charge you for reducing your debts! (The one exception maybe where you have been missold a credit card or other loan – some companies that deal with this need to start legal proceedings on your behalf and may charge a nominal fee).

Full and Final Settlement

If you owe money to a bank or credit card company or have had your debts passed to a debt collection agency (DCA) then you may have already received a letter telling you that you can pay a certain amount to settle the account.

Here’s what you may not know. Once the banks have passed your account to a debt collection agency they have effectively sold the debt to a third party.

This means that your lender will add your debt to all the other bad debts on their annual accounts and write them off against tax. So your debt is actually helping the bank to save money!

More importantly the debt collection agency will only have paid a few pence for every pound you owe. This means that if the DCA paid 40p for every £1 of your debt and you agreed to pay them 50p for every £1 you owe, they will still make a profit.

Some DCAs will pay as little as 1p in every £1 you owe in order to buy your debt.

This puts you as a creditor in a very strong position. If you make a reasonable offer to your bank, credit card company or DCA they won’t have to spend more money chasing the debt and they will get some money today!

There are a number of charitable organisations who will act on your behalf and help you to negotiate these debts maybe down to half of what you owe.

Make sure you use a reputable charity or specialist firm. The serious companies will not charge you. Unfortunately there are hundreds of companies out there with names that sound semi-official whose only motive is to get you to pay hundreds of pounds for them to perform their ’services’ – please try to avoid them at all costs!

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