If your lender agrees to let you settle a debt for less than what you owe, you'll need a written agreement that outlines information about the debt, what you'll be expected to pay, how much will be forgiven, and what the repayment terms are. If your lender doesn't send an agreement, you can use this template to draft a written agreement to make sure you're both on the same page.
Written by Mark P. Cussen, CFP® , CMFC.
Updated October 19, 2021
If you’ve come to an agreement with a creditor to settle an outstanding debt, you’ll need to draft a debt settlement agreement. This is a written agreement that outlines who owes the debt (you), who the lender is, the amount of the debt, the total amount of debt that will be forgiven, and the terms of repayment. If you want to make sure that your contract is legally binding, you may want to enlist an attorney to help. In this article, we’ll look at what components should be in a debt settlement agreement. Then we’ll outline a template you can adapt and use with your creditors.
What a Debt Settlement Agreement Must Include
After you have negotiated a debt settlement with a creditor, such as a credit card company, you will need to formalize your agreement in writing. You can write the agreement yourself and send two copies to your creditor so that they can send a signed copy back to you. Or it may be easier to have your creditor draft up a letter and send it to you. Many creditors will do this automatically.
Every debt settlement agreement must contain the following:
The original creditor and debt collector’s company name;
Your full name;
Your account number;
The full balance that is owed;
The settlement amount that was agreed upon;
The terms and number of payments to be made, including the interest rate that will be charged (if you aren’t doing a lump-sum settlement);
The date(s) that payment(s) must be received by (the due date);
Words indicating that the account will be satisfied in full when the settlement amount is paid;
How the account will be reported to the credit bureaus (Settled / Settled-paid less than owed / Settled-Zero balance, Paid in full, 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).
Sample Debt Settlement Letter Template
Here is a general template that you can use to draft your debt settlement agreement. You can add to, remove, or modify the information contained in this agreement to match your circumstances. The agreement letter can be either simple or complex, depending upon your specific financial situation and the type of debt that you owe.
Just remember that this is only a template. Its offering here should not be construed as a recommendation for its use as a final legal document. You are encouraged to seek legal advice if you need to. You can also find other templates for this type of document online.
Debt Settlement Agreement
1. This Debt Settlement Agreement (hereafter, “Agreement”) is between ________________________ (“Creditor(s)”), and ______________________________ (the “Debtor”). (When mentioned together, the “Parties.”)
2. ___________________ (mm/dd/yyyy) is the effective date of this Agreement.
The Parties agree to the following terms:
3. Debtor currently owes $____________________ (“Present Debt”). The account number associated with the Present Debt is ________________________.
4. Creditor agrees to accept a Debt Settlement Payment in the amount of $____________________ as full payment and satisfaction of the Present Debt. Upon acceptance of Debt Settlement Payment, Creditor will a) discharge the Present Debt as paid in full, b) update/modify its internal records to denote Debtor's Account associated with the Debt as paid in full, and c) make any and all efforts to report to all credit reporting agencies that Debtor's Account associated with the Debt is marked as paid in full.
5. Debtor will make Debt Settlement Payment by: [choose one]
-Lump sum, on or before ___________________ (mm/dd/yyyy).
-Installments: [specify the number of payments, amounts, and due dates]
Debtor will execute Debt Settlement Payment by: [choose/identify one]
If Debtor fails to make any payment by its due date listed above, this Agreement will immediately become void.
6. This Agreement is binding on the Parties involved, including successors or assignees.
7. If any provision or part of this Agreement is deemed unenforceable for any reason, the remaining provisions or parts will remain in full effect.
8. This Agreement shall be under governing law of the State of ______________________.
Debtor's name: _______________________________
Debtor's signature: ____________________________
Date signed: ____________________
Creditor's name: ______________________________
Signature of creditor's authorized representative: ____________________________
Date signed: ____________________ (Effective date)
Be aware of the impact that a debt settlement agreement can have on your credit score. If your creditor agrees to report to the credit bureaus that your debt has been paid in full, then this can help your score. Conversely, if your creditor reports that you have only paid in part or settled for a lesser amount of debt, then this could create another blemish on your credit report.
If you’ve negotiated a settlement with a creditor, you can use this template to get the terms of the agreement in writing. You can modify this template to fit the needs of either party. If you want to ensure that your agreement is legally binding, don’t hesitate to have an attorney write it or review your copy. They may also have other useful legal advice regarding your debt settlement agreement. Debt settlement can help you find debt relief and get your personal finances in order, so be sure to follow the guidelines presented here.