What to Ask for in a Debt Settlement Agreement

Debt settlement can wipe out your old obligations and break the cycle of minimum payments. You can start fresh without the burden of debt collectors calling you.

Before you begin the settlement process, you need to know what to ask for. Your written agreement should protect your interests and ensure you get released from the debt.

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The end goal is simple. You want to be released from the remaining balance and have your account reported as settled or paid in full.

Essential Items to Include in Your Settlement Agreement

Your settlement agreement must contain specific information to protect you. Never accept a verbal agreement or vague promises from creditors.

Here are the mandatory items you need in writing:

The date of the settlement agreement
Your legal name and address
The original creditor’s name and account number
The collection agency’s name and account number (if applicable)
The total settlement amount
The payment due date
Where to send payment (physical address or online portal)
Clear statement that payment constitutes full settlement of the account
Requirement that the creditor reports the settlement to credit bureaus
The creditor’s release of all further claims related to that debt

You can add any terms specific to your situation. If you’re paying over several months, include those due dates in the agreement.

How Debt Settlement Works

Debt settlement means paying off an old debt for less than you owe. You make a one-time payment or a series of payments as agreed.

In exchange, your creditor releases you from future collection efforts. They report your account as settled to the credit bureaus.

Once you fulfill the settlement terms, the creditor cannot pursue you for payment anymore. Our partner Solo can help you negotiate and finalize these agreements.

You can save thousands of dollars in interest and penalties. You’ll also pay less than the original amount you owed.

The Impact on Your Credit Score

Your credit score will take a hit when you settle debt. Recovery may take some time, depending on your other accounts.

You might face difficulty getting new credit or buying a home temporarily. But you can rebuild your credit and emerge in a better financial position.

The money you save can go toward things that truly matter. You can take care of your family and start saving for retirement.

Should You Settle Debt Yourself or Use an Agency?

Debt settlement agencies promise to settle your debts for a fraction of the cost. They negotiate with creditors on your behalf while you make monthly payments.

But settlement agencies are expensive. You’ll typically pay about 25% of your total debt value for their services.

The fees get baked into your monthly payments. You also have no guarantee of actual savings from their negotiations.

A Quick Example

Mike has $10,000 in credit card debt. He signs up with a debt settlement agency.

The agency settles all debts for 65% of their original value. They add 25% to the bill for their services.

Mike ends up saving only 10%, which equals $1,000 total. He could have negotiated directly and kept that 25% in his pocket.

You can handle debt settlement yourself and save those fees. It requires more effort, but the payoff makes it worthwhile.

How to Start the Debt Settlement Process

First, list all the debts you plan to settle. Include the total amount owed, the current creditor’s name, and your last transaction date.

Next, create a savings plan. You should save as much as possible each month toward paying off debt.

Stop Making Payments Strategically

Proper debt settlement requires you to stop making payments to your creditors. When payments stop, creditors become more willing to accept settlement offers.

They believe you no longer have money to keep up with minimum payments. You gain negotiating leverage as a result.

Put the money you’d normally pay creditors into savings instead. If possible, take on extra work to save more toward settlements.

The faster you settle your debts, the quicker you can recover financially.

Prioritize Your Debts

Identify which creditors you want to pay off first. Some people start with small debts for early wins.

You’ll build negotiating skills before tackling larger obligations. Larger debts can be costly to settle, so experience helps.

What to Include in Your Settlement Offer

You need to send a debt settlement offer that you can modify for each account. The offer should include specific information about you and the debt.

Include these details in every settlement offer:

Your name and contact details
The creditor or debt collector’s name
Your account number
The amount you currently owe
What you can offer in settlement
Instructions for the creditor to approve or deny your request
A request to report your account as paid in full

The settlement amount varies based on who owns the account and its age. If your account is still with the original creditor, 50% is a fair starting offer.

For accounts that haven’t had payments for at least six months, this percentage makes sense. Collection agencies might accept even less.

How to Negotiate When You’re Being Sued

If a debt collector is suing you, you need to act quickly. Follow these steps to protect yourself and settle the debt.

Step 1: File an Answer to the Lawsuit

File an Answer to the debt lawsuit as soon as possible. Send a copy to the opposing attorney immediately.

Our partner Solo can help you draft and file your Answer in minutes. Filing protects you from losing by default judgment.

Even if you plan to settle, filing an Answer gives you negotiating power. Collectors know you’re taking the lawsuit seriously.

Step 2: Make a Settlement Offer

Decide how much you can afford to pay the debt collector. You’ll want to offer a fair amount based on your situation.

Start at 60% of the debt value if you’re being sued. For a $10,000 debt, offer $6,000 to the collection agency.

Multiple negotiations are normal before reaching an agreement. Don’t get discouraged if your first offer gets rejected.

Step 3: Get Everything in Writing

Obtain the creditor’s consent to the settlement in writing. You need a statement confirming your account is clear.

Make sure the agreement states they’ll pursue no further collection efforts. Request that they report your account as paid in full to all credit bureaus.

Paid in full status tells future creditors you have no remaining obligations. Settlement status also works, but paid in full is better.

Why Settlement Technology Works Better

Modern settlement tools use technology to handle negotiations for you. You don’t have to deal with stressful phone calls from collectors.

The software drafts, sends, and receives settlement offers on your behalf. It manages your settlement agreement documentation and payments automatically.

You can keep your financial information private and safe. The service makes payments to collectors for you directly.

Advantages Over Traditional Settlement Companies

Technology-based settlement has clear advantages over traditional debt settlement companies:

You can settle debts of any size, not just debts over $15,000
Active settlement attempts happen immediately, not passively waiting for offers
Legal defense options are available if you get sued during settlement
Lower fees mean more savings stay in your pocket
Transparent processes with no hidden charges or unclear terms

Traditional debt settlement companies don’t provide legal defense. If you’re sued for a debt, you’re on your own.

What Makes a Settlement Agreement Legally Binding

A legally binding settlement agreement requires specific elements. Both parties must agree to the terms in writing.

The agreement must include consideration, meaning both sides give up something. You pay money, and the creditor forgives the remaining debt.

Both parties must sign the agreement voluntarily. No one can force you to accept terms you don’t agree to.

The agreement must be clear and specific about payment amounts and dates. Vague language can lead to disputes later.

Common Settlement Agreement Mistakes to Avoid

Don’t accept verbal promises from creditors or collectors. You need everything in writing before making any payment.

Never make a payment before receiving the signed settlement agreement. Some collectors will take your money and continue pursuing the full debt.

Don’t agree to payment terms you can’t afford. Defaulting on a settlement agreement can restart collection efforts.

Make sure the agreement releases you from all claims. Some creditors try to keep the option to pursue remaining balances.

Verify that the agreement includes credit bureau reporting requirements. Your credit report should reflect the settlement properly.

After You Settle Your Debt

Keep all settlement documents in a safe place. You may need them if disputes arise later.

Monitor your credit reports to ensure the creditor reported the settlement correctly. You can dispute inaccurate reporting with the credit bureaus.

Save proof of payment for at least seven years. Collection agencies sometimes sell debts even after settlement.

If a collector contacts you about a settled debt, send them a copy of your agreement. Remind them that the debt was settled and they must cease collection efforts.

Focus on rebuilding your credit after settlement. Make on-time payments on any remaining accounts and keep credit utilization low.

Frequently Asked Questions

What is the most important thing to include in a debt settlement agreement?

The most critical element is a clear statement that your payment constitutes full settlement of the account and releases you from all future claims. You also need the creditor's agreement to report the settlement to credit bureaus and cease all collection efforts. Always get these terms in writing before making any payment.

How much should I offer to settle a debt?

Start by offering 50-60% of the debt value if the account is with the original creditor and at least six months delinquent. For debts owned by collection agencies or older debts, you may offer less. The amount depends on the debt's age, who owns it, and your financial situation. Expect to negotiate through several counteroffers.

Can I settle a debt if I'm already being sued?

Yes, you can settle even after being sued. First, file an Answer to the lawsuit to protect yourself from default judgment. Then make a settlement offer to the collector's attorney. Get the settlement terms in writing before paying, and ensure the agreement includes dismissal of the lawsuit with prejudice.

What happens if I pay a settlement but didn't get it in writing first?

Paying without a written agreement is risky because the collector can take your money and still pursue the full debt. If this happens, you'll have difficulty proving you had a settlement agreement. Always get signed written confirmation of settlement terms before making any payment to a creditor or collector.

How long does a settled debt stay on my credit report?

A settled debt typically remains on your credit report for seven years from the date of first delinquency. However, the negative impact decreases over time. Having the account reported as 'paid in full' instead of 'settled' can help minimize damage to your credit score.