Get your finances on track with a debt settlement letter

If you're wallowing in debt, sending a debt settlement letter to creditors to lower your amount of debt might work, as it does for many people who want to eliminate debt. See what you can do to put your finances and your life back on track.

by Ronna L. DeLoe, Esq.
updated May 11, 2023 ·  4min read

If you have significant credit card debt, there are several ways you can lower or eliminate it. You can use credit card repair techniques, such as making automatic payments or moving balances from a higher interest credit card to a lower or no interest credit card.

Man in button up shirt holding paper

You also can try debt consolidation or debt management, which require paying what you owe in one combined payment per month, in addition to debt consolidation company or credit counselor fees. Both debt consolidation and debt management have other disadvantages: Many people don't finish paying according to their arranged plan, which can start the collection process again.

Alternatively, you can try debt settlement, which requires a debt settlement letter and a debt settlement agreement. For some people, debt settlement is preferable to other alternatives.

Overview of debt settlement

Debt settlement is where you owe an amount of money to your creditors, usually for credit card debt, and you make an offer to settle your debt for less than you owe. You can send creditors debt settlement negotiation letters, but creditors won't lower the amount of your debt unless they truly believe:

  • You're unable to pay.
  • You haven't paid in awhile.
  • You may file for bankruptcy, which could cancel your debt, if they don't settle.

Often, you can call creditors yourself and follow up with a debt settlement letter. Your goal is to get a debt settlement agreement with the creditor and to have the debt marked "paid in full."

Debt settlement pros and cons

You can hire debt settlement companies to negotiate for you, but, in many cases, you won't save much money because you're paying the settlement company on top of paying the settled amount of debt. Additionally, just because you hire a debt settlement company doesn't mean the creditors will actually settle your debts, and many debt settlement companies are fraudulent.

Sometimes using a debt settlement company is problematic because the company advises you to stop paying your creditors and place some of your earnings in a separate account. Only when there's enough money in the account does the debt settlement company negotiate for you. In addition, while you stopped paying your creditors, you're likely to get:

  • Collection letters and phone calls
  • Many late fees
  • Higher interest rates on the credit cards
  • A lower credit score
  • Lawsuits by some of the creditors

The good part about debt settlement is that it can prevent bankruptcy, and creditors will stop hounding you once you've settled the debt. If you've decided to pursue debt settlement, try communicating with your creditors yourself by using a debt settlement letter. If you work out something with your creditors, you'll have a reduced debt and not owe a debt settlement company a percentage of what they saved you.

Keep in mind, though, that any portion of your debt that is forgiven is considered taxable income to you.

How to write a debt settlement proposal letter

If you write the letter yourself, write a debt settlement hardship letter. This type of letter explains that you're experiencing hardship because of a job loss, high medical bills, insufficient income, divorce, or other dire situation.

Writing a debt settlement letter isn't difficult, although you can have an attorney prepare one for you. Most debt settlement letters include:

  • The date, name, and address of the credit card company
  • A notation after the address that this is regarding a hardship letter [Re: Hardship]
  • The credit card number and amount of the debt
  • A short statement of your financial situation, why you're in that situation, and why full payment is a hardship
  • Offering to pay a certain percentage of the entire amount—without offering more than you need to—such as 20% (negotiations start low and have nowhere to go but up)
  • Explaining that you're trying to avoid bankruptcy, which credit card companies hate
  • That you're reaching out to all your creditors with the same offer
  • That you'll start paying once they accept your proposal in writing, stating that they have a certain amount of time to accept
  • That your offer and their acceptance shall be embodied in a debt settlement agreement
  • A request to pay your settled debt in amounts you can handle each month
  • A copy of your monthly income and expenses
  • A request that any agreement be marked "paid in full"

Don't send any money with your settlement letter, because there's no guarantee the creditor will accept your terms.

Make sure you get anything that the companies promise you in writing, so that you eventually end up with a debt settlement agreement. A debt settlement agreement is a contract between you and the creditor, whereby the creditor settles the outstanding debt for less than you owe. The agreement contains a structured settlement, where you pay a set amount each month, or it requires a lump sum payment. Get the term "paid in full" in the agreement, along with the creditor's promise to remove your debt from the credit bureaus.

While debt settlement isn't right for everyone, it might work for you. If you need assistance with a debt settlement agreement, an online service provider can prepare one for you.

Ready to start your Debt Settlement Letter LEARN MORE
Ronna L. DeLoe, Esq.

About the Author

Ronna L. DeLoe, Esq.

Ronna L. DeLoe is a freelance writer and a published author who has written hundreds of legal articles. She does family … Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.