Writing a Debt Settlement Agreement (Forms & Templates)

A debt settlement agreement is a signed contract between a debtor and creditor regarding a debt settlement. This signed contract is used when a debtor wants to make a final payment that is less than the remaining debt owed. A debt agreement form is also known as Debt negotiation agreement, Resolution of credit agreement, Credit negotiation, Negotiation of debt settlement, Resolution of debt agreement

If a debtor defaults on payment of a debt, it can create conflict for everyone involved. This is where the debt settlement agreement, also known as the debt settlement letter, comes in. Rather than pursuing or avoiding payments, a contract will allow the parties to come together and renegotiate the terms. The aim is to lay down new rules that will help the debtor avoid defaulting again.

Applicable law

There are specific state laws in the United States that govern debt settlement agreements. These laws cover debt principles like a required written agreement and general contract agreement principles like mutual understanding and formation.

After the remaining debt is paid, the creditor removes the debtor’s obligations as per the original contract. All negative postings from the debtor’s credit report will then be removed.

How to Write a Debt Settlement Agreement

Writing a debt settlement agreement is very easy if you know the format and what information you should include.

Below are step-by-step instructions on how to write a debt settlement agreement:


The introduction identifies the contract as a resolution of debt agreement. Identify the parties concerned and the date of the agreement. Both parties must be the same as those who signed the initial contract and should have the same identities, i.e., the debtor is still the debtor, the creditor is still the creditor.


Recitals establish the context of the agreement and provides crucial background information on the parties involved. Include the loan amount that was granted and the exact date of the original loan agreement. Use the final blank space to show how the debtor is in default under a loan agreement. Mention that the recitals need you to attach a signed copy of the loan agreement or other documents to the paper.

Acknowledgement of existing debt

In this section, the parties involved, i.e., the creditor and the debtor, acknowledge the original debt amount. You only use the bracketed space if the debt was loans that the creditor made to the debtor.

The agreed amount

Write the amount you are accepting from the debtor regarding the remaining debt. The number you enter should be an amount that you and the debtor have agreed on.

Creditor’s release

This section contains the creditor’s pledge that after signing the contract and taking all necessary steps under the agreement, you would give up all your rights to claim the entire original sum of the debt or take further action against the Debtor. Remember that you are not releasing any claims arising under the settlement agreement.

Debtor’s release

The Debtor’s pledge that after signing the contract and taking all necessary steps under the agreement, he/she would give up all rights to sue or take further action against you. Remember that the debtor does not release any claims arising under the settlement agreement.

Representations and warranties of the parties

In this section, you swear that you have not assigned the debt to a 3rd party Unless the debtor and creditor are not human beings, i.e., companies and partnerships. You and the debtor can use this part to mention additional promises, understandings, etc. For example, you may need the debtor to state its financial situation before settling the debt. If there are no additional warranties or representations, you want to include, delete the blank spaces.

Effective time of releases

It states that when the agreement is signed, and the debt is paid, the releases become effective.

Additional terms

This section is optional. It can contain any terms that have not been listed. For example, if the parties share confidential information, you should include a clause for the security of that information.

General provisions

This section contains various subsections with simple objectives:

Notices: Give the addresses where all official or legal information should be sent. Write the postal addresses for each of the parties involved in the agreement.

Successors: This section states that the agreement will be passed on to the creditor’s and debtor’s successors and that the obligations under the agreement cannot be transferred without the written consent of either party.

Waiver: This part elaborates that the creditor and debtor cannot dismiss any section in the agreement and that any agreement changes should be signed by both parties and in writing.

Agreement: Both parties agree that the agreement they are signing is about the relevant issues involved. Including this clause does not prevent a creditor or debtor from stating that other promises exist. However, it will protect you from such claims.

Severability: The severability clause protects the terms of the contract as a whole even when one part of the agreement is voided.

Governing law: This allows the creditor and debtor to select state laws that will be used to interpret the agreement. Remember that this is not a provision for a venue. The language used would not have an effect where a possible claim can be made.

Voluntary execution of the agreement: It shows that the creditor and debtor have reviewed and understood the document and have had enough opportunities to acquire legal counsel if needed.

Electronic signatures: Even if the creditor and debtor sign the debt agreement in different areas or sign electronically, i.e., using computers, they will all be considered part of the same document. This clause ensures business can be done effectively without questioning the agreement’s validity even when both parties are not in the same location.

Additional Tips for Preparing the Form

The following tips will guide you in writing a debt settlement agreement:

Debt validation notice

Before a debtor agrees to pay the debt, they will ask you to send a written validation of the debt. The debt validation notice contains information such as the creditor’s name, a description of the debtor’s rights, and the sum of the remaining debt. If the debt is not disputed within 30 days, it is considered valid. Payments should not be made until the debtor receives a validation notice.

Payment schedule

Any negotiated amount in an agreement to be paid in installments should be written down together with the exact amount and the due date. Any promises made by a creditor regarding debt satisfaction when the negotiated amount is paid should also be written down.

Clarify the consequences for violation of agreement terms

The thing about debt settlement agreements is that you must fulfill them; otherwise, the contract will fall apart. For example, depending on the settlement terms, if a payment is missed or paid late, the entire amount will become due automatically, or the creditor may resume collection efforts. Acquire in writing any violation of the agreement that could result in the termination of the settlement agreement.

Both parties must sign this document to make it effective

The final condition of this contract would be to bind all parties to its terms and conditions. This can only be achieved by the dated signatures of the two parties. The debtor has to sign this document to enter into it officially. 

The creditor must sign their name on the “creditor’s signature” line and then include the date that the creditor signed this document on the empty line next to it. Below that, the creditor must sign his or her name. If the creditor is a business entity, the person approved by that business entity to sign this document on their behalf must sign their name.  When printing their name, it should be followed by the signature party with the legal name of the business entity as indicated in the first paragraph.

Dos and Don’ts Checklist

Mistakes like lack of clarification of terms are common in debt settlements. Here are a few do’s and dont’s to help you avoid this and other errors:

  • Before you sit down and write, determine what your objectives are for the settlement. How much of the balance is going to be paid off? When would this payment have to be made? Clarify these terms before you write them down.
  • Do not use the enclosed form if your agreement is complex. Contact your lawyer to help you prepare a plan that will meet your unique needs.
  • Allow each side to spend time reviewing the agreement. This reduces the probability of claiming that a party did not fully understand certain terms or how they could affect the agreement.
  • All parties should closely review the agreement to ensure that all appropriate points in the contract have been included. It’s safer to be over-inclusive than under-inclusive.
  • Depending on the terms of the agreement, you can decide to have the agreement witnessed or certified. This will prevent later objections to the legitimacy of the signature of the party.
  • Debt settlement reduces or removes unsecured debt by agreeing to a negotiated sum of payment with creditors. This is generally not the case if the mortgage is secured since the lender would have a right to take the property that secures the loan.
  • There are advantages and disadvantages of the creditor looking to settle the debt. While your monthly expenses will be reduced, you will normally need to make immediate large payments to complete the settlement. Your creditors may report any settlement to the credit agency. If you have good credit, it will have an immediate and significant negative effect.
  • Sign two copies of the contract, one for you and one for the other party.
  • Debt settlement may result in income tax liability. Creditors must disclose any debt forgiven over $600 to the IRS, and the debtor will receive an IRS form for the value of the debt forgiven. Speak to a lawyer or tax professional for more information on these implications.

Debt Settlement Agreement Sample

(Creditor’s name) and (debtor’s name) hereby agree to compromise the balance of the debt on the following terms and conditions:

(Creditor’s/ Collection Agency’s name) and (debtor’s name), both parties agree that the remaining debt is $____________. In addition, the parties consent that (Creditor’s name) will accept a sum of $____________ and consider it as full payment. The acknowledgment of the payment will be viewed as a full discharge of all due invoices, and (name of the creditor/collection agency) will not take any further steps to recover the supposed debt. Payment will be made after the agreement has been reached, either by check or by money order.

This arrangement will be effective until (date) and will be considered null and void if the debtor fails to make the payment before the due date, and the status of the account will remain as due.

Upon satisfactory payment of the compromised sum, (Creditor’s name) agrees to delete any harmful details that might have been put on the credit report of the debtor. Also, (Creditor’s name) promises never to put such details on the debtor’s credit report in the future.

Both parties must comply with the agreement’s rules and benefit the parties, their heirs, and the assignees.

Dated: (Today’s date)

Signature: _____

Legal representative of (Creditor’s name)

Signature: __

(Account holder’s name)

Free Agreement Forms & Templates

We have provided you with downloadable and easy-to-follow debt agreement form templates to guide you on our website. Writing debt settlement agreement forms is relatively easy, especially when you have a template to guide you. It saves time and makes work easy as you do not have to memorize the format. Please visit our website and try our templates.





    Frequently Asked Questions

    What percentage of a debt is typically accepted in a settlement?

    A payment of about 50% – 70% of the remaining amount of debt is acceptable if it can be paid immediately.

    Is a settlement good for your credit?

    Yes. Settling debt is good for your credit as the creditor will remove all the harmful postings on your credit report. A good credit report means that you can be trusted to pay back loans.

    Final Words

    Usually, a debt settlement letter is used to clarify in writing what verbal arrangement a debtor has with a creditor to settle their debt. However,  make sure that you send two copies of the letter through registered mail so that you can have evidence that the other party has received it. Also, submit one signed copy of the agreement. It is very important to settle debts so that one can have a good credit report. Having a good credit report means that you do not default payments, and you can be trusted with loans.

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