Debt settlement agreement 2024 (guide + free sample)

Here you will learn everything you need to know about debt settlement agreement.

I was so shocked to read the average American household debt statistics on

The stats revealed that the typical American owes around $96,371 in debt, based on the latest available data from 2021.

This is an increase of 3.9% compared to the average debt of $92,727 in 2020.

And the data predict more increase in the coming years.

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The clear message I got from those data is this (from a legal perspective), ‘We need a legal tool(s) to protect us in debt settlement processes especially when we agree to the debtor’s offer proposal to get debt relief.’

And I’m sure the quick one we can employ is a debt settlement agreement.

A debt settlement agreement is the only agreement that you will need to set out terms and conditions regarding the debt settlement.

The problem is this document is a bit technical.

If you are not familiar with some legal principles you may come up with a non-binding agreement.

Thus you need assistance from an experienced person.

And there is where I come into play.

To help come up with an effective debt settlement agreement, here I will guide you through;

  • What is a debt settlement agreement?
  • Why do you need a debt settlement agreement?
  • When do you need a debt settlement agreement?
  • How do you draft an effective debt settlement agreement?
  • debt settlement agreement template
  • etc.

Let’s get started

What is a debt settlement agreement?

A debt settlement agreement is a written binding contract between a creditor and debtor setting out the terms and conditions of the debt settlement.

The important thing to note here is that;

You do not always need a debt settlement agreement.

A debt settlement agreement is more effective when you (a creditor) agree to the debtor’s proposal to get debt relief.

Here is how the debt settlement agreement comes into place.

When a debtor is unable to repay a debt in full, he may write a debt settlement letter to request you to pay a certain amount instead of the full debt.

Instead of wasting time and money searching down a debtor, you may agree to his request.

From there you will need a separate binding agreement i.e debt settlement agreement to document the terms and conditions regarding the request.

That agreement, among other things, will show the full balance that is owed, the settlement amount that was agreed upon, the terms and number of payments to be made, etc.

The good news is;

According to, a debt settlement is the most consumer-friendly debt relief option for Americans overwhelmed by unsecured debt, offering struggling consumers an established path to improved financial health.

And I think there is no way you can archive that without a well-drafted debt settlement agreement

Related: Loan Agreement (guide + free template)

Why do you need a debt settlement agreement?

As I said before a debt settlement letter that you will receive from a debtor is not legally binding.

Thus unenforceable.

Therefore you need a debt settlement agreement as a legally binding agreement to lay out the terms and conditions of a debt settlement process.

This agreement will help you define

  • The entire outstanding balance;
  • The amount agreed upon as a settlement;
  • Mode of payment
  • Date of last payment
  • Your Rights, duties, and responsibilities
  • Acts as evidence in case the issues will be taken to court
  • etc.

When do you need a debt settlement agreement?

There are different instances that you will need to employ a debt settlement agreement.

Some of them include;

  • When you want to lay down agreed terms and conditions of a debt settlement.
  • When you need to establish a debt amortization schedule with interest rates.
  • When you need to be strict with the payment timeframe
  • etc.

How do you draft a binding debt settlement agreement?

To write a legally accepted debt settlement agreement you have to clearly outline the terms and conditions of the settlement so that both of you are aware of what you are signing.

To be enforceable your agreement must comply with state and federal laws designed to prevent illegal or improper practices in debt collection.

The following are the things that you should include in your debt settlement agreement, to make it legally binding.

  1. Title of document i.e DEBT SETTLEMENT AGREEMENT
  2. Date of the agreement
  3. the names and addresses of the creditor
  4. the names and addresses of the debtor
  5. The entire outstanding balance;
  6. The amount agreed upon as a settlement;
  7. The terms and amount of installments required, as well as the interest rate that will be charged
  8. Last payment date
  9. Mode of payment
  10. Post-payment obligations- specify what the creditor or debtor should do when the debt is settled.
  11. Governing law clause
  12. signatures of the creditor and debtor

Debt settlement agreement template

The following is a sample of a debt settlement agreement that you may use in your next debt settlement transactions.


THIS DEBT SETTLEMENT AGREEMENT is made this ………. day of…… 20… 


[name of the creditor] of [address] (hereinafter called “the creditor”) of the one part


[name of the debtor] of [address] (hereinafter called “the debtor”) of the other part

WHEREAS the debtor is indebted to the creditor the full amount of [insert the full debt amount] in relation to Account/Bill No [#]

WHEREAS the debtor is incapable of paying the said full amount and requested the creditor to pay [agreed amount] instead and the creditor hereby accepts to receive that amount to settle the debt according to the terms of this agreement

THEREFORE in consideration of the mutual covenant and promise made by the parties hereto, the creditor and debtor agree as follows

Acknowledgment of debt

The debtor agrees and acknowledges that he is indebted to the creditor the full amount of [insert the full debt amount] in relation to Account/Bill No [#]

Settlement amount

The creditor agrees to accept from a debtor a total final payment of [$#] as full payment of outstanding debt.

Mode of payment

The debtor will make Debt Settlement Payments by [mode of payment- check, direct deposit et.] by -Lump sum, on or before [due date] or Installments: [specify the number of payments, amounts, and due dates]

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

Post payment obligations

After the Debtor has completed the payment, the Creditor shall

  • discharge the Present Debt as paid in full
  • update/modify its internal records to denote Debtor’s Account associated with the Debt as paid in full
  • take all reasonable steps to get the outstanding debt removed from the Credit Reporting Agencies. Furthermore, the Creditor declares that they will not provide any extra information that could impair the Debtor’s credit record.


If any provision of this Agreement or the application thereof shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this Agreement nor the application of the provision to other persons, entities, or circumstances shall be affected, thereby, but instead shall be enforced to the maximum extent permitted by law.

Governing law

This Agreement shall be under the governing law of the State of [name of the State]

IN WITNESS WHEREOF the parties hereto have set their hands hereunto and respectively signed these presents the day, month, and year hereinafter appearing.

Creditor’s Signature: ____________ Date: ______

Debtor’s Signature: ____________ Date: ______

Debt settlement agreement pdf

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Isack Kimaro
Isack Kimaro

Isack Kimaro brings over 7 years of extensive experience in professional writing. My career has been dedicated to mastering the art of clear, effective communication, essential for successfully professional correspondence.