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Writing a Debt Settlement Offer Letter

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In a Nutshell

A debt settlement offer letter serves as a borrower's offer of some sum of money to a creditor in exchange for forgiveness of the remainder of the debt. The proposal in your debt settlement is a legal contract offer, so it is important to use precise language, such as the language provided in the template section of this article.

Written by the Upsolve TeamLegally reviewed by Attorney Andrea Wimmer
Updated November 30, 2021

Debt collectors and the debt collection process can create overwhelming anxiety and stress. Fortunately, there are several ways to get debt relief. A debt settlement, especially for an amount less than what you owe, is one option that will address your debt and save you money. 

A debt settlement letter contains a proposal offer that will hopefully open the door to negotiate a fair and reasonable debt settlement. This letter is useful whether you are negotiating with the original creditor, a collection agency, or a debt buyer. This article provides a template for a debt settlement proposal letter and explains what a debt settlement letter should contain.

What Is a Settlement Offer Letter?

The main reason to negotiate a debt settlement is to find debt relief, but it can also save you money. When you eliminate debt through a debt settlement, you’ll also decrease your use of credit, which will increase your credit score. Paying off debt for less than the full amount you owe is a great way to find debt relief and relieve financial stress.

After initiating the negotiation process with your settlement letter, you can discuss any settlement with your creditor over the phone. Know that any agreement you reach must be in writing to be legally binding. Your debt settlement letter will be most effective if it clearly expresses the detailed terms of your settlement request in writing.

A settlement offer letter will contain your proposal to offer some sum of money to the creditor in exchange for forgiveness of the rest of your debt. The letter should typically explain why you can’t pay the full debt, how much you're willing to pay right now, and the exact action you want in return from the creditor.

Things To Consider While Pursuing Debt Settlement

As with each form of debt relief, debt settlement has advantages and disadvantages

Advantages of Debt Settlement

Like debt settlement, bankruptcy is a useful debt relief tool. But settling a debt with a creditor can leave you in a better financial position than bankruptcy. This is especially true if you can convince your creditor to agree to report your debt as “paid” rather than “partially paid” to the credit bureaus. Agreeing to pay a significant portion of your debt can help you convince a creditor to agree to do this. If you reach a debt settlement with a creditor, it typically amounts to 50% to 80% percent of the total amount owed, which is considerable savings. 

Disadvantages of Debt Settlement

As you negotiate your debt settlement for debts like a credit card, keep in mind that principal, interest, late fees, and other costs will continue to accumulate if you’re no longer making regular payments. There’s no guarantee that you’ll be able to negotiate a settlement agreement with your creditor. If you can’t reach a settlement, you may owe even more on the debt because of the additional missed payments, interest, and late fees. 

You can hire a professional to negotiate a debt settlement on your behalf. But they often charge high fees. This will reduce how much money you might save from a settlement. Also, you must be careful since some companies aren’t reputable. Another disadvantage is that the success rate for debt settlement is low even for reputable companies. It may be helpful to get some legal advice if you have further questions.

Even a successful debt settlement can appear as a negative entry on your credit report and lower your credit score. If you missed payments during the time leading up to settlement, these missed payments can remain on your credit report for seven years. Still, lenders may look more favorably on a closed collections account that's marked as "settled" than an open collections account.

Finally, if your debt is canceled, forgiven, or discharged for less than the amount you legally owe there may be tax consequences. The IRS considers canceled debt taxable income that you must report on your tax return for the year the cancellation occurred.

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Steps To Take if You Seek a Settlement Offer

The first decision for you to make is whether you will negotiate the debt settlement yourself or hire debt settlement professionals to negotiate on your behalf. Professionals can help you, especially if you believe that you lack the communication skills necessary to negotiate with debt collectors. However, professionals can be expensive and some creditors refuse to work with debt settlement companies.

You can only send a debt settlement letter after you’ve saved up the money that you’ll offer to pay as final settlement. Many creditors are only willing to accept a lump-sum payment. If the creditor accepts your proposal, you’ll have to pay the amount as agreed within a short time.

When writing the letter, explain your current financial situation and how much you’re willing to pay given your current resources. Also, clearly describe what you expect the creditor to do for you in return for making payment. This can include removing the account or any missed payments from your credit file. It can also include reporting the account as "paid in full" or "paid as agreed" on your credit report.

If the creditor agrees to your settlement terms, request written confirmation of its agreement to your terms. If it makes a counteroffer and you agree, ask the creditor to formalize the proposal in a written agreement. Don’t send any payment until you receive a written confirmation. You should only make the payment once you’ve received written confirmation and both you and the creditor have signed a formal, written agreement. Make sure that you stay in contact with the creditor until it fulfills all terms of the debt settlement agreement.

Writing the Settlement Offer Letter

A debt settlement letter is, in effect, a written legal contract. It’s important to make direct, explicit, and detailed statements. 

Include your personal contact information, full name, mailing address, and account number. Specify the amount that you can pay, as well as what you expect from the creditor in return. A good starting point for negotiation could be offering around 30% of the amount that you owe. 

You must convince the creditor that you can’t pay the full amount of your debt. This will require you to explain your financial situation in some detail. Financial hardship can include unexpected medical bills and unemployment. Depending on your situation, a creditor may ask for medical records or other documented proof of your circumstances.

You can find debt settlement letter templates online or use the sample letter template below to help you write your letter.

Debt Settlement Letter Template


[your name]

[your address]

[city, state, zip code]

[your phone number]

[creditor/organization name]

[creditor/organization address]

[city, state, zip code]

Re: [account number for the debt amount]

Dear Sir/Madam,

This letter is in reference to the account number identified above and its outstanding debt. Due to financial difficulties, I am unable to pay the outstanding balance in full. [Explain your hardship to the creditor here.]

I would like to offer $ amount [make an opening offer for possible negotiation here] as a full settlement amount. I request in return [state specifically all that you want the creditor to do — remove account missed payments from your credit file, report account as "paid in full" or "paid as agreed" to all credit bureaus, etc]. I also request that I have no further liability regarding the debt of this account.

If this proposal is acceptable, I ask that you send me a written and signed agreement to that effect. When I receive your agreement, I will pay the settlement amount within [number of days within which the creditor can expect your payment]. Please notify me of your decision by [date/ time limit you give creditor to respond].


[your signature and name]

Let’s Summarize...

A debt settlement letter can help you trigger the process of negotiating a debt settlement with a creditor, whether it’s the original lender or a collection agency. It’s important that your debt settlement letter contains certain facts without providing the debt collector with information it can use against you in a lawsuit. The proposal in your debt settlement is a legal contract offer. A template like the one in this article can help you put your proposal into words. Once a creditor agrees to your proposal, it’s up to you to perform your end of the agreement. 

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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