Debt settlement agreement 2023 (guide + free sample)


This post covers debt settlement agreement.

Receiving payment for an unpaid debt is not always simple, and your debtor may not always be able to pay you in full.

By putting new terms in writing, a formal agreement can assist you in recovering some of your losses.

If you’ve agreed to settle an outstanding debt with a debtor, you’ll need to prepare a debt settlement agreement.

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

If you want to ensure that your debt settlement agreement is legally binding, you should seek the assistance of an experienced person. I’m here.

I will take 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?
  • sample of debt settlement agreement
  • 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.

This agreement is always prepared when a creditor agrees to the debtor’s offer to get debt relief.

This is how things work.

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

Instead of wasting time and money searching down a debtor, a creditor may agree to the debtor’s request.

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

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

I think things are clear now! let’s move to the next important part.

Related: Loan Agreement (guide + free template)

Why do you need a debt settlement agreement?

In fact, 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 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?

The following are the instances in which you will need a debt settlement agreement to safeguard the settlement process.

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

How do you draft a 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 creditor and debtor are aware of what they 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 write in your debt settlement agreement

  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

Sample of debt settlement agreement


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

Holder of Bachelor of Laws (LL.B) and Post Graduate Diploma in Legal Practice. I am dedicated to providing valuable and easy-to-understand legal information for individuals at all levels of understanding. Whether you are a layperson looking to increase your knowledge, a law student striving to excel in your studies, or a practicing lawyer wanting to expand your expertise, I am here to help. I'm not creating content, I'm creating awareness to empower you to take control of your legal understanding and achieve your goals.