Debt Settlement Agreement

Settling a due debt can prove difficult for a debtor who does not have the full outstanding amount but wishes to protect their credit report. Similarly, the creditor in this scenario would likely wish not to make a complete loss by not getting paid at all. When this is the case, both parties may agree to sign a document that ensures a win-win situation: the debtor gets a reduced payable amount and the creditor recoups some losses. This document is called a debt settlement contract or agreement.

A debt settlement contract can take two forms, depending on who is drafting it. It can represent the signed agreement between the creditor and debtor or read like a settlement proposal drafted by one party to settle the outstanding debt.

What Is a Debt Settlement Agreement?

A Debt Settlement Agreement is formal official contract signed by a debtor and creditor who wish to negotiate and compromise on a debt, so as to reach a mutually agreeable settlement. It is used in situations where the debtor would like to settle an outstanding debt but does not have the full amount, and the creditor would like to avoid a total loss. Typically, the debtor will agree to pay at least 50 to 70 percent of the original debt by a set date and the creditor will consider the debt settled in full.

Applicable Debt Settlement Laws

Debt principles like the formation and mutual agreement of a contract as well as the execution of written acknowledgements are all governed by state laws in the US. This means that debt settlement agreements are subject to these same laws and must be prepared in accordance with them. Additionally, it means that the enforcement of such contracts will vary from state to state.

What to Include in a Debt Settlement Agreement

By law, a Debt Settlement Agreement becomes a binding document when it is signed by the debtor and creditor or collection agency of a certain debt. It is also admissible in court when sent via fax, the US Postal Service, or as an email PDF attachment. While the content will definitely vary from case to case, the agreement must contain the following elements:

  • The names and mailing addresses of the creditor and debtor.
  • The date the agreement was prepared.
  • The date it takes effect.
  • A description of the outstanding debt.
  • The adjusted debt amount.
  • The new payment terms and account details.
  • A pay-by date.
  • A statement explaining that the debt will be considered settled if paid in the described manner. You can use phrases such as ‘accepted as fully settled’ or ‘paid in full.’
  • The governing law state.
  • Port payment details including credit status following payment.
  • Any state-required disclosures (applies to collection agencies).

How to Write a Debt Settlement Agreement

Step 1: Obtain the relevant documents, such as receipts, involves, and previous debt notices then supply the information from these papers to the format presented below.

Step 2: Indicate the debtor and creditor names in the allotted spaces, producing their full mailing addresses by city, street address, zip code, and state.

Step 3: Report the following information:

  • Date prepared – This is the date when the agreement was prepared. In cases where it is not similar to the effective date, it should be reported separately.
  • Effective date – This is the date when the terms of the signed agreement will become effective.
  • Description – This is one sentence that explains the nature of the agreement.
  • Parties – Under the title ‘parties’ you shall idebtify the involved parties as the creditor (person owed the money) and debtor (person who owes the money). You must also supply their addresses.
  • Debt – This portion should discuss the nature and description of the debt by amount owed, reason it is owed, and when it was first due.
  • Settlement – This is the most important section of the agreement as it outlines the adjusted debt amount, which the creditor and debtor agree will deem the entire debt settled.
  • Payment details – This section explains how and when the debtor will make this payment. It indicates the expected payment date and relevant account details.
  • Post payment – Lastly, post payment affirms that the debtor will be released of all obligations of the adjusted debt amount it paid in the manner discussed by the agreed upon date. It also confirms that the creditor will cease all collection efforts against the debtor.
  • Governing laws – Mention the state whose laws and regulations will govern and enforce the terms of the settlement agreement.

Step 4: Have both parties sign the agreement next to their name at the bottom to execute the contract. This can be done in the presence of a witness, attorney, or notary, as desired.

Debt Settlement Agreement Format

{Date Prepared}

{Effective Date}

The following Agreement represents the negotiation and settlement of a debt under the stated terms:

The Parties: {Creditor’s Name} of {full address} mailing address shall be referred to as the ‘Creditor,’ and {Debtor’s Name} of {full address} mailing address shall be known as the ‘Debtor.’ Referred to jointly, they shall be called the ‘Parties.’

Debt: The Debtor owes the Creditor an outstanding debt of {total amount} for {nature of debt}, owed as of {debt date}.

Settlement: The parties agree that said debt will be considered paid in full if the Debtor makes a payment of {agreed on amount} to {account details} by {payment date}.

Post-Payment: Once this payment has been made, the Creditor will remove it from Credit Reporting Agencies and will not supply or post any information that might harm the Debtor’s credit report.

By signing below, the Creditor and Debtor agree to abide by the terms and conditions of this Settlement Agreement.

Creditor: {Signature}, {Signature Date}

Debtor: {Signature}, {Signature Date}

Debt Settlement Agreement (Word Template)

Debt Settlement Agreement

Key Points

A Debt Settlement Agreement is a written and binding contract between a creditor and debtor for the settlement of an outstanding debt. To be effective, it must identify the involved parties and describe the nature of the debt by amount owed and previous due date. It should also detail the payment terms including expected date of payment, new payment amount, and the relevant account details. Finally, it should explain that the debtor’s obligations will be considered met if the debt is paid as so.

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