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Individual negotiation with creditors is one alternative to formal insolvency where the debtor wishes to avoid bankruptcy or an Individual Voluntary Arrangement.

You may also, quite reasonably wish to avoid entering into any formal court based arrangement with creditors. You may, therefore prefer to individually negotiate with creditors to agree a mutually convenient way forward.

In practice, it can be that individual negotiations only work if you have three creditors or less as you must be confident that you can maintain any agreement made with your creditors. Should there be more than three creditors, you may find that it is more difficult to reach a satisfactory agreement with them.

You will firstly have to determine the grounds for negotiation, for example a full and final settlement or reduced monthly payments. Creditors may agree to the proposal on the basis that the offer is made by an independent third party.

It may be that you are in a position to raise a lump sum (for example by way of re-mortgage) to repay your creditors by way of a full and final settlement offer. This does not mean that you have to repay your creditors in full, it could be that you offer your creditors 50% of the total value of the debt.

To do this, you must ensure that you have written confirmation from the creditors concerned.

A standard letter to each creditor must be sent informing them of the situation that you find yourself in and giving them full details of the offer that you are making. That letter must be comprehensive as the creditor must understand why you are making a reduced offer and feel that there are grounds to consider and accept the offer.

Prior to issuing any payment to your creditors we always ensure that we have got written confirmation that they agree to your proposal. Should a cheque be issued with the offer then the creditors could accept the payment and then still chase you for any remaining balance.

The other alternative is to agree with your creditors that you make reduced monthly payments until your circumstances improve. Clearly, this would mean that the debts must be paid in full, but at a lower sum to ease your monthly financial burden.

Again, your situation would need to be explained to the creditors concerned by way of a letter. An income and expenditure account should be included to explain the monthly financial burden that you are under and the monthly payments that you are able to make for example 50% of that sum requested by the creditor.

You may find, however, with this type of arrangement that the creditor continues to apply interest to the account. You must also be aware that there is nothing to stop the creditors agreeing to your proposal now and then taking enforcement action against you later to recover the whole amount owing. Again, it is most important that everything is agreed in writing in order that there is proof of the agreement made and no confusion can arise later.