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What is a debt settlement?

Sometimes, you may want to clear your debts through one payment. Perhaps you have received an inheritance or an investment has matured? You may have received a bonus or some commission from your work. Or, perhaps you have received a financial windfall?

Whatever the source of the lump sum, you may want to use this cash to repay your debts. That is where a debt settlement may be a viable option. Keep reading to learn more about debt settlements and how they could help you.

What is a debt settlement?

A debt settlement is a process that allows you to repay your debts in one reduced payment. It will help you clear your debts immediately and means you can avoid entering into a debt management plan or an Individual Voluntary Arrangement (IVA). It also helps avoid your debts being passed to a collections agency.

As part of the process, a third party will normally negotiate a lower settlement figure with your creditors. In return for the debt being repaid, a creditor may accept a lower lump sum payment.

How does a debt settlement work?

If you receive a lump sum, you may want to use this money to repay your debts. When you approach a specialist debt settlement expert, they will negotiate with your creditors in an attempt to agree a lower settlement figure.

Once a figure is agreed, you can repay your debt with your cash lump sum.

When might a debt settlement be suitable for me?

There are lots of reasons that you may receive a lump sum. These include:

  • Bonuses or commissions from employment
  • An inheritance
  • The sale of a property or other major asset
  • Maturity or cashing in of an investment
  • A remortgage or debt consolidation loan
  • A payout from an injury claim

A debt settlement expert will use their relationships with creditors to negotiate a reduced settlement figure on your debt. You can then use the cash sum to repay the borrowing, leaving yourself debt free.

Bear in mind that a debt settlement will require the agreement of your creditors and is based on your personal circumstances. A debt settlement company may also charge a fee for their services.

One advantage of debt settlement is that it should not negatively affect your credit rating. This is because the payment will be considered a ‘satisfactory’ settlement by your creditors. However, if you have any defaults or County Court Judgements (CCJs), these will remain on your credit file for up to six years.

Once the debt is repaid, your creditors should mark the debt as ‘satisfied’, which will ensure your credit rating is not harmed.

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