Debt Settlement Agreement

Debt settlement agreement summary: 

• A debt settlement agreement is an official contract in which your creditor agrees to accept less than you owe as payment in full. 

• Debt settlement agreements must include a few key features to protect your rights and give your creditor confidence that you will pay the settlement amount. 

• Be aware of the pros and cons before you pursue a debt settlement agreement. 

Debt Settlement Agreement Definition and Meaning

A debt settlement agreement is a legally binding document between a debtor and a creditor. This agreement specifies the terms under which a debt will be resolved for less than the full amount due. Getting a debt settlement agreement signed is an important final step in the process of going through a debt settlement program. 

Debt settlement attorneys can help you write a good debt settlement agreement with the right legal language to protect your future. A professional debt settlement company could also help you negotiate and craft a well-written debt settlement agreement that protects your rights. Or you can negotiate with your creditors by yourself and sign a debt settlement agreement that your creditor provides. 

Key Features of a Debt Settlement Agreement 

Every person’s financial situation is unique, but most debt settlement agreements include these key features. 

Details about the overdue debt 

A debt settlement agreement should start by identifying the debt. The document needs to include the correct amount of overdue debt, your account number, and clearly state that you accept responsibility for the debt. Make sure that the details about your debt are correct and exact before you sign.  

Debt settlement amount 

The debt settlement agreement should show exactly how much you have to pay to get rid of the debt. Clarify this number with your creditor and get it in writing. For example, if you owe $5,000, your creditor might accept a smaller payment of $3,500—your settlement amount. This part of the debt settlement agreement should also spell out if you need to pay the money in a lump sum or in installments.    

Release of liability

Also called release of claims, the release of liability part of the debt settlement agreement is where your creditor officially agrees to charge off your remaining unpaid debt. By accepting your settlement amount, your creditor also promises not to pursue you for additional payments on the debt.

Default clause

In case you fail to pay your debt settlement amount, this part of the agreement explains what happens next. Defaulting on a debt settlement agreement for an already-overdue debt might sound unlikely, but it could happen. A default clause protects your creditor in case you fail to pay by giving the creditor the right to:

• Pursue debt collections 

• Charge you for extra collection costs

• Take you to court

Time frame to pay the settlement

A debt settlement agreement should include a specific time frame or due date for you to pay your creditor. This could be a 30- to 60-day window or a single date. The time frame should also include a commitment from your creditor for how soon they will report your debt to credit bureaus as resolved or settled.

Debt reporting on your credit report 

Part of your debt settlement agreement could include having your creditor give you favorable treatment when reporting your debt to credit bureaus. For example, you might ask your creditor to report your debt as paid in full on your credit report, or have late payments removed from your credit history. Not every creditor will agree to this, but it’s worth asking.    

The bottom line for a debt settlement agreement is that it should protect both you and the creditor. As the debtor, you want to make sure your obligation truly goes away after paying the settlement amount. And your creditor wants to know that you’ll definitely pay the settlement amount. Both sides of the debt settlement agreement have to be satisfied with the deal. 

Real-Life Example of a Debt Settlement Agreement

Emergency dental surgery left Joe with a $7,200 medical credit card debt. He made minimum payments but fell behind when his hours were cut at work. After 120 days of missed payments, he started getting calls from the collection agency that had taken over the account.

Joe called the collection agency and explained his hardship. He said he could borrow $2,500 from a family member and offered that as a full settlement.

The collector usually required at least 50% of the original balance but asked for a written hardship letter and a formal settlement offer. Joe emailed a letter explaining his income, expenses, and situation, and offered $2,500 to settle the full debt.

The debt collector called back with a counteroffer of $3,000, which Joe agreed to. The collector emailed Joe a settlement agreement confirming:

• The $7,200 account would be settled in full for $3,000.

• No further collection efforts would occur.

• The debt would be reported as settled. 

• Payment had to be made within 21 days.