This debt settlement agreement is between , an individual a(n) (the "Creditor"), and , an individual a(n) (the "Debtor").

The Creditor and the Debtor are parties to a loan agreement promissory note dated (the "Original Agreement"), a copy of which is attached to this agreement as Exhibit A.

Under the Original Agreement, the Creditor loaned the original principal amount of $ to the Debtor. To date, the Debtor has made payments to the Creditor totaling $. The Debtor currently owes the Creditor $, which is the original amount, less payments made, plus accrued interest of $ (the "Outstanding Debt").

The Outstanding Debt constitutes the entire outstanding indebtedness of the Debtor to the Creditor as of the effective date of this agreement, including principal, interest to the date of this agreement, and costs.

The parties wish to resolve the dispute between them and to settle the subject matter of the dispute and all claims that could be made in connection with it, with no party admitting any liability to the other party, except for the obligations in this agreement.

The parties therefore agree as follows:


  • (a) Settlement Amount. As repayment in full of the Outstanding Debt, the Debtor shall pay $ to the Creditor (the "Settlement Amount").
  • (b) Payment Details. The Debtor shall pay the Settlement Amount as a lump-sum payment on .
  • (b) Payment Details. The Debtor shall pay the Settlement Amount as a monthly payment of $ on the day of each following month, for months.


  • (a) Credit Reporting Agencies. After full payment of the Settlement Amount, the Creditor shall notify the three major credit bureaus (Equifax, Experian, and TransUnion) that the Debtor's account has been paid as agreed and instruct them to delete any negative listings relating to this account.
  • (b) Discharge. The Creditor's acceptance of the Settlement Amount serves as a complete discharge of the Outstanding Debt, and the Creditor will then release the Debtor of all claims, whether known or unknown, foreseen or unforeseen, that the Creditor has against the Debtor in connection with the Outstanding Debt, but does not release the Debtor from claims arising from a breach of this agreement.
  • (c) Failure to Pay. This agreement is expressly conditioned on the Settlement Amount being paid to the Creditor in full no later than . If the Debtor does not pay the Settlement Amount by , the Outstanding Debt owed by the Debtor will be reinstated in full and be immediately due.


The Creditor states that:

  • (a) it has not transferred or assigned any portion of the Outstanding Debt to a third party, and no third party has any right to payment of all or any part of the Outstanding Debt; and
  • (b) it has no claims or potential claims against the Debtor except the Outstanding Debt.

The parties' obligation to complete the transactions under this agreement is subject to these statements of fact being true at the effective date described in section 13 below. Each party will indemnify the other against all claims arising from the statements of fact being incorrect.


The releases described above become effective immediately on the effective date of this agreement (as described in section 13 below) and the payment of the Settlement Amount by the Debtor.


  • (a) Choice of Law. The laws of the state of govern this agreement (without giving effect to its conflicts of law principles).
  • (b) Choice of Forum. Both parties consent to the personal jurisdiction of the state and federal courts in , .
  • (c) Attorneys' Fees. If either party employs attorneys to enforce any rights arising out of or relating to this agreement, the losing party shall reimburse the prevailing party for its reasonable attorneys' fees.


No amendment to this agreement will be effective unless it is in writing and signed by a party or its authorized representative.


  • (a) Counterparts. The parties may execute this agreement in any number of counterparts, each of which is an original but all of which constitute one and the same instrument.
  • (b) Electronic Signatures. This agreement, agreements ancillary to this agreement, and related documents entered into in connection with this agreement are signed when a party's signature is delivered by facsimile, email, or other electronic medium. These signatures must be treated in all respects as having the same force and effect as original signatures.


If any one or more of the provisions contained in this agreement is, for any reason, held to be invalid, illegal, or unenforceable in any respect, that invalidity, illegality, or unenforceability will not affect any other provisions of this agreement, but this agreement will be construed as if those invalid, illegal, or unenforceable provisions had never been contained in it, unless the deletion of those provisions would result in such a material change so as to cause completion of the transactions contemplated by this agreement to be unreasonable.


  • (a) Writing; Permitted Delivery Methods. Each party giving or making any notice, request, demand, or other communication required or permitted by this agreement shall give that notice in writing and use one of the following types of delivery, each of which is a writing for purposes of this agreement: personal delivery, mail (registered or certified mail, postage prepaid, return-receipt requested), nationally recognized overnight courier (fees prepaid), or email.
  • (b) Addresses. A party shall address notices under this section to a party at the following addresses:
  • If to the Creditor:
  • If to the Debtor:
  • (c) Effectiveness. A notice is effective only if the party giving notice complies with subsections (a) and (b) and if the recipient receives the notice.


No waiver of a breach, failure of any condition, or any right or remedy contained in or granted by the provisions of this agreement will be effective unless it is in writing and signed by the party waiving the breach, failure, right, or remedy. No waiver of any breach, failure, right, or remedy will be deemed a waiver of any other breach, failure, right, or remedy, whether or not similar, and no waiver will constitute a continuing waiver, unless the writing so specifies.


This agreement constitutes the final agreement of the parties. It is the complete and exclusive expression of the parties' agreement about the subject matter of this agreement. All prior and contemporaneous communications, negotiations, and agreements between the parties relating to the subject matter of this agreement are expressly merged into and superseded by this agreement. The provisions of this agreement may not be explained, supplemented, or qualified by evidence of trade usage or a prior course of dealings. Neither party was induced to enter this agreement by, and neither party is relying on, any statement, representation, warranty, or agreement of the other party except those set forth expressly in this agreement. Except as set forth expressly in this agreement, there are no conditions precedent to this agreement's effectiveness.


The descriptive headings of the sections and subsections of this agreement are for convenience only, and do not affect this agreement's construction or interpretation.


This agreement will become effective when all parties have signed it. The date this agreement is signed by the last party to sign it (as indicated by the date associated with that party's signature) will be deemed the date of this agreement.


Each party shall use all reasonable efforts to take, or cause to be taken, all actions necessary or desirable to consummate and make effective the transactions this agreement contemplates or to evidence or carry out the intent and purposes of this agreement.


Each party is signing this agreement on the date stated opposite that party's signature.




Attach original agreement


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How-to guides, articles, and any other content appearing on this page are for informational purposes only, do not constitute legal advice, and are no substitute for the advice of an attorney.

Debt settlement agreement: How-to guide

No matter the protective measures taken, it is a simple market fact that borrowers default on loan terms or payments. In some cases, the outstanding debt amount may be too much for the debtor to manage, and continuing payments may force them into bankruptcy. 

A creditor can decide that rather than gamble on a debtor’s future liquidity, an immediate debt settlement agreement will make the best of a declining situation. The borrower can get part of its burden lifted, eliminating continuing payments and growing default and interest costs without sacrificing its credit score or business relationships.

A debt settlement agreement allows the lender to forgive part of what a debtor owes if it receives an immediate settlement amount. The agreement is meant to release both parties from their obligations.     

Instructions checklist for debt collectors and debt settlement companies

Debt settlement negotiations

Debt settlement is a means of reducing or eliminating unsecured debt by negotiating an agreed-upon payoff amount with creditors or debt collectors. This usually doesn’t occur if a debt is secured since the lender will have the right to take the property that secures the loan in lieu of payment.

Tax liability for debt relief 

Settling a debt can result in income tax liability. Creditors must report any forgiven debts in excess of $600 to the Internal Revenue Service (IRS), and the debtor will receive an IRS form for the amount of the forgiven debt. Talk to an attorney or a tax professional for additional details about these consequences.

Pros and cons of settling outstanding debt

There are pros and cons for the borrower looking to settle a debt. Although your monthly payments will be reduced, you usually need to make an immediate lump sum payment to complete the settlement. Your creditors may report any settlement to the credit bureaus. If you have a good credit score, this will have an immediate and large negative impact. If your credit score is bad, debt settlement or negotiation may have less impact and may be a better choice. Consider these and other personal factors before entering into a binding settlement agreement. 

There are also pros and cons for the lender looking to settle the debt. They can recover money that would be unavailable if the debtor entered bankruptcy: even a partial settlement is better than nothing. However, the creditor is ending the possibility of obtaining the total amount that they are owed.

Debt settlement terms 

Before sitting down to write, decide exactly what your goals are for the settlement. How much of the debt balance will be paid off? When will this payment need to be made? Clarify these terms before writing them down.

Properly review the debt settlement letter

The creditor or debt collector and the borrower must review the debt settlement agreement carefully. Ensure it is comprehensive and has all the details.

Signature formalities

Both debtor and creditor agree to sign two copies of the debt settlement agreement. One copy is kept by the creditor, and the other by the debtor.

You may decide to have the contract witnessed or notarized, depending on the nature of the terms.

Essential clauses of a debt settlement agreement

A debt settlement agreement constitutes the following provisions.


This section identifies the document as a debt settlement agreement. Provide the details of the parties involved and the agreement's effective date. The effective date is generally the date on which the agreement is signed. 

The parties must be the same as those who signed the original document that generated the debt. If there is a new signer, ensure they are the agent of the same company and hold the same designation. For example, if the manager signs the agreement on behalf of the debt settlement company and leaves the company in the future, then the new signee would be the new person appointed by the company as the manager.


The “whereas” clauses, referred to as recitals, define the world of the agreement and offer key background information about the parties. Put in the effective date of the original loan agreement (or when the promissory note or other financial documents were signed). Write the loan amount that was provided. 

You must also mention how the borrower is in default under the terms of the agreement or other documents. You must attach a signed copy of the loan agreement or other document along with the debt settlement agreement.

Acknowledgment of existing obligation

In this part, both parties acknowledge the debt owed by the borrower. Mention the amount of the original debt too.

Settlement amount

This section clarifies the amount that the lender is accepting from the borrower to settle the debt.

Lender’s release

It is the lender’s promise that after the signing of the agreement, and the taking of all needed actions under the agreement, it is giving up all of its rights to seek the full original amount of the debt or take any other actions against the debtor. 

However, the lender is not releasing any claims that arise under the settlement agreement. For example, if the debtor fails to pay the settlement amount, the lender is still entitled to bring a lawsuit to obtain that money.

Debtor’s release

This clause outlines the debtor’s promise that after the signing of the agreement and taking all needed actions under the agreement, it is giving up all of its rights to sue or take any other actions against the lender. 

But this doesn’t mean that the debtor is releasing any claims that arise under the settlement agreement. For example, if the lender is found to have assigned the debt to a third party violating the agreement, the debtor can bring a lawsuit alleging a breach.

Representations and warranties of the parties

The lender here is swearing that it hasn’t assigned the debt to a third party (in other words, this settlement agreement will be effective simply between the parties). Most of the remaining clauses are applicable only if the debtor or the lender are not individuals (i.e., they are partnerships, corporations, etc.).

The parties can also use this section to list additional promises, understandings, and assumptions. For example, the lender may require the debtor to make a statement about its current financial situation before settling a debt.

Effective time of releases

This section states that the releases become effective when the agreement is signed and the debtor pays the money.

Additional terms

This is an optional provision that can include any additional terms that haven’t already been listed. For example, if the parties exchange confidential information, you may want to include a provision governing the protection of that information.


It lists the addresses to which all official or legal correspondence should be delivered. Write a mailing address for each of the parties to the agreement.

Successors and assigns

It states that the agreement will be passed on to either party’s successors and assigns and that neither party can transfer its obligations under the agreement without the prior written consent of the other party.

Waiver and amendment

It explains that neither party can ignore or dismiss any part of the agreement and that any changes to the agreement will be in writing and signed by both parties.

Entire agreement

Here, the parties agree that the contract they’re signing is “the agreement” about the issues involved.


This clause protects the terms of the agreement as a whole, even if one part is later invalidated.

Governing law

This section allows the parties to choose the state laws that will be used to interpret the agreement.

Voluntary execution of the agreement

It indicates that all parties have had time to review and understand the agreement and have had sufficient opportunity to obtain legal representation (if desired). 

Counterparts; electronic signatures

The parties can sign the agreement from different locations using electronic signatures in this provision.

Since now you know the important clauses of a debt settlement agreement, creating an agreement suiting your needs can be a breeze. However, using a professional debt settlement agreement template makes this job a lot simpler. 

Though you can find a lot of online template providers, to use their templates, you might need to pay for them. LegalZoom offers a professional debt settlement template that you can use readily. Simply answer the guided questionnaire, complete the form, and download the document created from the template for free. It is that easy. 

In case your debt settlement agreement is complicated or there are multiple debts, it is better to take the help of an attorney. They can help you draft a document that will meet your specific needs.

Frequently asked questions

What’s a debt settlement agreement?

When a borrower defaults on a loan, it can cause stress and conflict for everyone involved. That's where a debt settlement agreement, also known as a debt settlement letter, comes in. Rather than chasing down or avoiding payments, an agreement can help the parties come together and renegotiate terms. The goal is to establish new rules to settle loans quickly and amicably that help the borrower avoid defaulting again.

What key details are required to complete a debt settlement agreement?

Here's the information you'll need to have handy to complete your debt settlement agreement:

  • Who it's coming from: Determine if a business or individual is sending the document and have the name and contact information ready.
  • Who it's going to: Know who this document is going to and have the individual or business name and contact information ready. If it's a business, make sure you know the business type (LLC, corporation, etc.).
  • Which state will govern it: Specify a state so it's clear what laws apply to the document.
  • Subject matter: Have information about the amounts paid and outstanding balance.
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