How to negotiate a debt settlement

We understand here at PayPlan that life can quickly cause costs to mount up, and a once manageable debt can soon become unmanageable. This is why if you are able to negotiate a debt settlement and relieve yourself of monthly payments, it’s a good idea to consider doing this.

Receiving a large, lump sum of money, for example, is just one reason why you may be considering proposing debt settlement to your creditors. An inheritance payout, a lottery win or even a bonus at work could be considered a substantial enough amount for your creditors may agree to close the credit account.

You may have also been saving on top of your debt repayments to build up a large enough sum to negotiate with.

How much should I offer creditors in a full and final settlement offer?

This all depends on how much money you have – but the higher the offer the more likely it is to be accepted. Who you decide to offer a settlement to though depends on what you owe and how much you have in the bank.

You could ask just one creditor to accept your offer and tick that debt off your list before continuing with repayments on any other debts you owe. You could also make settlement offers to more than one or all your creditors to see if they will accept.

How to negotiate a debt settlement on your own

Once you’ve decided on the amount you want to offer, you will need to send a debt settlement proposal letter to your creditors. This will detail how much you want to offer to settle what you owe and when you can pay this by. The letter will also explain why you are unable to pay the full amount if the settlement offer figure is less than the total debt. Ensure you get proof of postage when sending this so you have a record of the date it was sent – then wait for the creditor to respond.

Keep all correspondence and get everything in writing

You should keep any correspondence you may have with your creditors for up to six years after any agreements have been made. This can be used as proof of your debt settlement if you are chased for payment at a later date.

Everything you agree with your creditor must be in writing too as proof of your agreement. It will protect you when dealing with a debt negotiation and won’t allow creditors to go back on anything they initially said yes to.

Get help if there’s anything you don’t understand

If you have any doubts about your agreement or don’t understand anything, it is a good idea to speak to an impartial, debt advisor who can explain things to you. Our team here at PayPlan are a good example of an expert source of help – you’ll find their contact details at the bottom of the page.

What if I want to pay more than one creditor in a debt settlement?

If you owe money to more than one creditor, you may want to share out your lump sum offering among them – but it’s important you work out how to do this fairly.

The creditor that is owed the most money will need to be offered the biggest share and so on. This is referred to as a pro-rata offer. As part of this offer, you should be honest with your creditors about how much of the share they are going to receive. We recommend you go about working out how to split your lump sum by following this formula:

Lump sum x each debt you owe ÷ the total amount you owe

Here is an example:

You owe £7,000 in total and can get together a lump sum of £3,000. Here is what you owe:

  • £3,000 credit card company
  • £2,000 personal loan
  • £1,300 overdraft
  • £700 catalogue

To work out how much of the share the credit card company – the biggest debt – receives, we will use the formula:

£3,000 x £3,000 ÷ £7,000 = £1,285.74

This means you would be able to offer the credit card company £1,285.74 from your total lump sum. You would then use this calculation to work out how much should be shared among the rest of your creditors.

Keep a note, either in a list or in a table, to show how much you owe and what you are offering each creditor. Here is a table based on the example above:

Offers made to creditors in a full and final settlement of £3,000

Creditor name

Total debt owed

Debt settlement offer

Credit card company



Personal loan












Feature this table in your debt settlement proposal letter, so each creditor can see what proportion of your lump sum they will be receiving.

How is a debt settlement listed on my credit report?

The credit account will be noted as closed but will be classed as ‘partially settled’ – most credit reference agencies use a flag featuring the letter P to show this. The balance left on the account should change to £0 as well, to show that nothing else is owed.

This will be seen by other creditors and could sway their decision if you apply for any other credit products. This is because ‘partially settled’ means you were unable to pay the full amount you owed. It will be removed from your credit report after six years from the date the debt was settled it though. After this time it shouldn’t affect your rating anymore.

What happens if a creditor won’t accept my offer?

You may find not all creditors will be happy to accept your offer and so you may have to negotiate further with them. This could lead to setting up a separate repayment solution to repay your debts or amending the amount offered if possible.

You could also consider using an IVA (individual voluntary arrangement) to encourage your creditors to agree to settle your debts or a DRO (debt relief order) if you do not own your home and meet the other eligibility criteria.

An IVA would usually require you to repay your debt via a monthly arrangement. If your lump sum is large enough though, you could suggest this is put forward instead as a one-off payment.

Setting up this insolvency solution would usually involve you making monthly payments. If you have a large lump sum of money though, the debt management company you use may be able to negotiate for this to be used to clear your debts.

However, it’s worth noting even though an IVA or DRO may seem like a quick win – if you can get your creditors to agree to their terms – but they will impact your credit rating.

We have more information about these debt solutions on our site – click here for information regarding IVAs and here for DROs.

If you feel like you need further advice or help when it comes to debt settlements, our team are here to answer any questions. Speak to an expert at PayPlan today on 0800 280 2816 or get in touch via our contact form.