Debt Settlement Agreement Letter: Template & Writing Guide

If your lender agrees to settle your debt for less, you need proof. A written agreement protects both parties and prevents future disputes.

Your debt settlement agreement must include specific details about the debt, payment terms, and forgiveness amount. Without proper documentation, you risk confusion and potential legal issues.

If your lender doesn’t send an agreement, you can draft one yourself. Use the template below to create a legally sound document.

What Is Debt Settlement?

Debt settlement is a debt relief option. You negotiate to pay less than the full amount owed.

Creditors most commonly accept settlements on unsecured debts. Credit card debt, medical bills, and personal loans qualify for settlement negotiations.

Secured debts like mortgages and car loans rarely settle. Creditors can repossess collateral instead.

Why would a creditor accept less? They fear getting nothing if you file bankruptcy. Unsecured debts can be completely discharged in bankruptcy proceedings.

Once you reach an agreement, you must formalize it in writing. The creditor usually drafts the letter and sends it to you.

If they don’t provide documentation, create your own agreement. Send two signed copies so they can return one for your records.

Written agreements ensure everyone understands the terms. You’ll have proof if questions arise later about the settlement.

For professional guidance on managing multiple debts, our partner Cambridge Credit Counseling can help you develop a comprehensive payment strategy.

Debt Settlement Agreement Template

Use this template to create your settlement agreement. Customize it to match your specific situation and debt type.

The agreement can be simple or complex depending on your circumstances. Include all relevant details to avoid confusion.

Standard Debt Settlement Agreement

Debt Settlement Agreement

This Debt Settlement Agreement (hereafter, “Agreement”) is between ________________________ (“Creditor(s)”), and ______________________________ (the “Debtor”). (When mentioned together, the “Parties.”)

___________________ [mm/dd/yyyy] is the effective date of this Agreement.

The Parties agree to the following terms:

Debtor currently owes $____________________ (“Present Debt”). The account number associated with the Present Debt is ________________________.

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.

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]

__ Certified check

__ Money order

__ Bank wire

__ Other: ________________________________.

If Debtor fails to make any payment by its due date listed above, this Agreement will immediately become void.

This Agreement is binding on the Parties involved, including successors or assignees.

If any provision or part of this Agreement is deemed unenforceable for any reason, the remaining provisions or parts will remain in full effect.

This Agreement shall be under governing law of the State of ______________________.

Signatures:

Debtor’s name (printed): ________________________________________________

Debtor’s signature: _____________________________________________________

Date signed: ___________________________________________________________

Creditor’s printed name: _________________________________________________

Signature of creditor’s authorized representative: ____________________________

Date signed: ______________________________________________ (Effective date)

Credit Reporting Considerations

Understand how settlement affects your credit score before signing. The reporting language matters significantly.

If your creditor reports the debt as “paid in full,” your score benefits. A “settled for less” notation creates another negative mark.

Partial settlement still beats unpaid debt on your credit report. Any resolution is better than continued delinquency.

What Does a Debt Settlement Agreement Have to Include?

Whether you or the creditor writes the agreement, certain elements are essential. Missing information can invalidate your settlement.

Include these critical details:

• The original creditor and/or debt collector’s company name

• Your full legal name

• Your account number

• The original amount of debt you owe

• The agreed settlement amount

• Payment terms and number of installments

• Interest rate charged (if applicable)

• Payment due dates

• Language confirming account satisfaction upon payment

• How the account will be reported to credit bureaus

• Any state-required disclosures

Credit Bureau Reporting Options

The reporting language is negotiable. Creditors may use several different descriptions:

• Settled

• Settled – paid less than owed

• Settled – zero balance

• Paid in full

Negotiate for “zero balance” or “paid in full” reporting. These options minimize credit score damage and look better to future lenders.

The difference in reporting language can significantly impact your creditworthiness. Fight for the best possible wording.

Next Steps After Creating Your Agreement

After drafting your settlement agreement, review every detail carefully. Errors can void the entire arrangement.

Send two signed copies to your creditor by certified mail. Request one signed copy returned for your permanent records.

Keep all correspondence related to the settlement. Store copies of checks, money orders, or payment confirmations.

Never make a payment before receiving the signed agreement. Verbal promises don’t protect you legally.

Consider having an attorney review your agreement before signing. Legal counsel can identify problematic language and suggest improvements.

If managing multiple debts feels overwhelming, our partner Cambridge Credit Counseling offers professional debt management plans that can reduce your monthly payments and interest rates.

Follow through on every payment deadline specified in the agreement. Missing even one payment typically voids the entire settlement.

After completing your payments, request written confirmation of account closure. Verify the creditor reported correctly to all three credit bureaus.

Debt settlement can provide meaningful financial relief when done correctly. Proper documentation ensures you receive the full benefit of your negotiated agreement.