If a lender agrees to settle a debt for less than what you owe, you need to get the details in writing for the agreement to be binding. This is especially important because many debt settlements happen via telephone. A debt settlement agreement letter is a tool you can use to do this. It must include key information about you, your account, your lender, and the repayment terms you've agreed to.
Written by Mark P. Cussen, CFP® , CMFC.
Updated October 5, 2021
If you have an outstanding debt that you are unable to pay off such as a credit card debt, then you may choose to negotiate a debt settlement. This allows you to pay less than what you owe and settle the account. Odds are good that you will negotiate with your creditor by telephone. But once you have negotiated your settlement, you will have to put your agreement in writing for it to be binding. A debt settlement letter can be used to fulfill this requirement. This document must have several pieces of key information. This article will explain debt settlement letters and outline what they must contain to be legally valid.
No Debt Settlement Agreement Is Binding Until It’s Put in Writing
Borrowers and creditors typically negotiate and make debt settlement agreements verbally by phone. And in many cases, you’ll have to make several calls to your lender or collection agency to reach an agreement that you both accept. This process can take months if you and your creditor cannot agree on a fair settlement amount. Other times, your creditor will mail or email you a debt settlement offer. Either way, once you reach an agreement, you can move forward with payment arrangements.
To make a verbal agreement legally binding, you must put it in writing. You can do this by drafting, or having the creditor draft, a debt settlement agreement letter. Once the letter is signed by both parties, it’s a valid legal document that outlines the details of your agreement and the new terms of repayment. It will include details like the names of the parties involved (you and your creditor), how much debt you owe, the settlement amount, and the terms of repayment.
If you’re trying to settle several debts with different creditors, you will need a separate letter for each settlement offer. If you have hired a debt settlement company to negotiate on your behalf, then the company will do this for you.
Make Sure Your Debt Collection Letter Covers These Key Points
You can draw up your own debt settlement agreement letter or have an attorney or debt settlement company draw one up for you. Once you’ve done this, you’ll need to send two copies to your creditor. Ask them to send you back a signed copy and to keep one for their records. Or you can ask your lender to draft and provide you with this document so that you’ll have a copy on their company letterhead. Most lenders will be willing to do this if you ask them to.
You can find several excellent templates for debt settlement agreement letters available for free online. In the end, the written agreement letter should contain, at a minimum, the following key points:
The names of the original creditor and the debt collector’s company (if there is one) and their contact information;
Your full name;
Your account number;
The total amount of money that is owed (the outstanding debt or original amount);
The settlement amount both parties agreed to;
If the settlement won’t be paid in a lump sum, the terms and amounts of payments to be made;
The date(s) the payment(s) must be received (due dates);
Words indicating that the amount of debt will be satisfied in full when the settlement amount is paid;
The terms of the credit reporting or how the account will be reported to the credit bureaus (Settled / Settled-paid less than owed / Settled-Zero balance, etc.). This is also negotiable — anything showing “zero balance” or “paid in full” looks better on your credit report;
Any disclosures that may be required by your state of residence (if necessary);
Any other disclaimers or warranties that should be included; and
The mailing addresses of both parties.
If you don’t write the agreement yourself, it’s important to insist that all this information is included in the final document. Don’t hesitate to walk away if your original creditor or collection agency seems reluctant to do this. If your creditor refuses to honor your request, then they risk getting nothing at all from you. Though you may need to bend a little in some circumstances. For example, some large banks will not send a settlement letter until they set up your payment information in their system.
If you can’t get the creditor to agree to and sign a comprehensive document with all the above details, you can walk away. Just realize that your credit score will most likely suffer if you can’t come to an agreement. That’s because your payment history — including late or missed payments and accounts that have been charged-off or sent to collections — is the biggest factor in your credit score.
No matter how much time you’ve spent on the phone with your creditor, how many different people you’ve talked to, or how many phone calls you’ve made, a debt settlement agreement isn’t legally binding until it’s documented in writing. If you cannot get a letter detailing the terms of your settlement offer, then you are still on the hook for the full amount that you owe. If you are able to get an agreement letter, make sure it’s clear, concise, and comprehensive. Use the points listed above as a guide. If you’re uncertain about the legality of your letter, contact an attorney for legal advice.
It’s also important that the amount you agree to pay in the debt settlement and the terms of repayment are realistic for you. If you are not able to meet these terms, then you can end up even worse off.