Letters to creditors

One of the horrible things about struggling with debt is having to deal with creditors chasing you for their money. They can be very persistent, particularly with customers who try to wish away their financial problems by ignoring them. It's very tempting to stick your head in the sand when you're scared.

Nevertheless, creditors have a responsibility to deal with you in a fair and sympathetic manner and they are much more likely to accommodate you if you are equally straight with them before they get so fed up with you that they sell your debt on to even more intimidating debt collectors.

If your difficulties are hopefully just temporary, begin by drawing up what's known in the business as a 'Statement of Affairs'. It's a list of your income, expenditure and your debts so you can work out how much surplus income, if any, you have to distribute among your creditors. Armed with that information, use the following sample letter to try and persuade your creditor to cut you a bit of slack.

Dear Sir/Madam

RE: Grabbit & Run Credit Card - Account Number:123456789

I am writing to tell you that due to unforeseen circumstances, I'm sorry to say that I will be unable to meet my financial commitments in full for the immediate future.

This is due to ...give brief details of what has led to your problems ie: losing a job, relationship breakdown, ill health.

I enclose a list of my creditors, which shows the balances left to pay and my regular monthly payments to each together with a list of my income and household expenditure. You will note from the statement that I have a monthly disposable income of £xxx, from which I propose to deduct £xxx per month for emergencies, leaving a monthly balance of £xxx.

In view of my circumstances, I am asking all my creditors to accept lower payments on a pro-rata basis for the time being and I would, therefore, ask you accept a reduced payment of £xxx to be reviewed in six months. I would also be grateful if you could consider freezing interest and charges so that the debt does not increase further. I appreciate that this may seem like a low offer but it is the most that I can afford to pay regularly and reliably at the moment without being unfair to my other creditors.

I would add that in the event of my circumstances changing for the better, I would, of course, increase payments as and when I am able to do so.

I would like to assure you that I take my responsibilities very seriously and with careful planning and your kind assistance, I hope that I will eventually be able to get back on track and satisfy my debts in full.

Yours faithfully

The important thing is to offer to pay only what you can afford. There's absolutely no point in making an offer of payment that you won't be able to maintain. If you want your creditors to give you some leeway then you mustn't break your promises.

Make sure too that you start paying what you've offered regardless of whether they accept it or not. It shows goodwill on your part and you'll get credit for effort if a creditor later decides to take further action through the courts. Besides, a judge is not going to make you pay more than you can afford so your creditors shouldn't expect you to either!

Unfortunately, even though creditors have an obligation to be fair and reasonable in their dealings with you, some of them might not be terribly accommodating. You could get a letter from one or two of them refusing to go along with your idea and threatening you with court action. So here's what your response could be.

Dear Sir/Madam

RE: Grabbit & Run Credit Card - Account Number:123456789

Thank you for your letter of date/month/year in which you refused my request to accept a lower offer of payment during my temporary difficulties. I note that you are also not prepared to freeze the interest rate and charges in the meantime.

Unfortunately, I am unable to improve on my offer so I, respectfully, ask you to reconsider my proposal. I enclose, once again, a list of my creditors, which shows the balances left to pay and my regular monthly payments to each together with a list of my income and household expenditure.I appreciate that you are not obliged to assist me but, should you take legal action against me, I understand that interest would be frozen in the event of a County Court Judgment and that I would be able to explain to the court that I had already asked you to consider my current proposal and that you refused.

I, therefore, hope you will reconsider my offer and, in the meantime, as a gesture of good faith, I will forward my reduced payments to you as proposed.

Yours faithfully

Remember that, even if they write back demanding a larger monthly payment, there's no point in making an offer that you won't be able to maintain, so don't be intimidated. And be reassured that if the matter does end up in court, a judge is far more likely to be on your side than theirs if you have shown that you are doing your level best to meet your obligations. So stick to your guns – politely but firmly!

But what happens if the debt is simply too much to manage over the long term or a debt collection agency has taken on your debt and you just want to get them off your back forever? If you have a lump sum in savings or you can get hold of some money by selling a major item or falling on the mercy of a generous relative, it is possible to make an offer of a 'full and final settlement'.

This means that you offer to pay of a sizeable proportion of the debt on condition they write off the remainder. The reason collection agencies might accept this is because they 'bought' your debt off your original lender at a discount or your lender is prepared to accept a lump sum from you as an alternative to putting up with token monthly payments for years on end.

You will usually need to find around half of the amount you owe but according to debt charities some companies accept as little as 35% of the debt owed. If you need to pay off several creditors then divide the money between them on a 'pro-rata' basis to ensure that each creditor gets a fair share of the money available.

One very important thing is never ever send any payment with your letter – always get an agreement to settle in writing before you hand over any money, otherwise they could simply bank the cheque and continue pursuing you for the balance. The fact that they've cashed it does not necessarily mean they've accepted it as full and final settlement.

Here's a sample letter for you to use.

Dear Sir/Madam

Without Prejudice

RE: Grabbit & Run Credit Card - Account Number:123456789

I write with reference to the money owed on the above account.

Unfortunately, I am unable to pay you the amount I owe in full because... give brief details of what has led to your problems ie: losing a job, relationship breakdown, ill health.

However, I can raise £xxx and would like to offer you this sum on the strict understanding that it is in full and final settlement of my debt and that neither you nor any associate company will take any further action to pursue this debt in any way whatsoever and that I will be released from any liability.

I also request that, if accepted, you will mark any entry on a credit reference agency file relating to the above account as "satisfied" in full.

I hope you will consider this to be fair and responsible settlement and on receipt of your signed acceptance, I will make arrangements for payment within the next 14 days.

Yours faithfully

Remember it is vital, if they accept, that you get their agreement to cancel the remaining debt in writing as disputes can happen years later. And make sure they also agree to contact the credit reference agencies to amend your files to show the debt has been 'satisfied'. You can check this has been done later by asking the credit reference agencies for copies of your credit file.