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Debt Settlement Agreement

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A debt settlement agreement in the United States is an agreement between a lender and a borrower to handle a debt for less than the full amount owed. This type of agreement can be used to resolve a debt that the borrower cannot fully pay.

The terms of a debt settlement agreement can vary but typically include a lump sum payment from the borrower to the lender in exchange for a release from the debt obligation. Please note that debt settlement can harm credit scores, as settling a debt usually involves defaulting on the original loan agreement.

Why Is a Debt Settlement Agreement Important?

In the debt settlement agreement, when a borrower cannot fully repay their debt obligations and wants to negotiate a resolution with their lender. A debt settlement agreement allows the borrower and lender to come to a mutually agreed-upon solution to the debt, which could result in the borrower paying less than the full amount owed.

This can be beneficial for the borrower, as it can reduce the debt they have to repay and help them get back on track with their finances. For the lender, a debt settlement agreement can resolve an outstanding debt and avoid the time and resources required to pursue collection through legal means. Overall, a debt settlement agreement can be a useful tool for both borrowers and lenders to resolve outstanding debt obligations.

What Are the Essentials of a Debt Settlement Agreement?

The agreement outlines the terms and conditions under which the debt will be paid, including the amount owed, payment schedule, interest rate, and consequences of default.

  • Identification of Parties

    The names and contact details of the creditor and the debtor are specified in the agreement to identify the parties involved.

  • Debt Amount

    The agreement outlines the total amount of debt owed, including the original debt, interest, and additional fees. This is important to ensure both parties clearly understand the debt being settled.

  • Payment Terms

    The payment schedule, the amount to be paid in each installment, and the due date of each payment are specified in the agreement. This outlines the expectations for the debtor to make timely payments and the creditor to receive payment.

  • Interest Rate

    The interest rate, if any, applied to the debt is specified in the agreement. This helps to determine the total amount the debtor will owe over the life of the debt settlement agreement.

  • Collection Costs

    Any collection costs, such as attorney's fees that may be added to the debt if the debtor fails to make payments as agreed are outlined in the agreement. This helps to ensure the creditor can recover additional costs if necessary.

  • Default Clause

    A default clause specifies what will happen if the debtor fails to make payments as outlined in the agreement. This may include collection proceedings or legal action.

  • Settlement Amount

    The agreed-upon settlement amount, typically lower than the original debt, is stated in the agreement. This is the amount the creditor agrees to accept as full payment of the debt in exchange for the debtor making regular payments as outlined in the agreement.

  • Release of Liability

    A release of liability provision specifies that the debtor will be released from any further liability for the debt once the settlement agreement is fully executed. This means that the debt is paid in full, and the debtor will not be responsible for any additional payments.

  • Jurisdiction

    The jurisdiction in which any disputes arising from the agreement will be resolved is specified. This helps ensure that any legal proceedings are handled in a convenient jurisdiction for both parties.

  • Signatures

    The signature lines for the creditor and the debtor indicate their agreement to the settlement terms. This indicates that both parties have agreed to the terms and conditions mentioned in the agreement.

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How to Amend a Debt Settlement Agreement

A debt settlement agreement can be amended by mutual agreement between the debtor and the creditor. Both parties must sign a written document specifying the changes to amend the agreement. It is important to keep a copy of the amended agreement for future reference.

If there is a dispute regarding the terms of the amendment, it may be necessary to seek the assistance of a mediator or attorney. In some cases, a court may need to intervene to enforce the terms of the agreement.

It is important to note that the laws governing debt settlement agreements vary by state, so it is important to ask an attorney knowledgeable in the laws of the jurisdiction in which the agreement was entered into.

To ensure the validity of the amendment, it is important to follow the proper legal procedures and to have the agreement in writing. It is also advisable to keep detailed records of the original agreement's terms and the amendment's terms.

Key Terms Related to Debt Settlement Agreement

  • Principal Amount: The total debt the borrower owes to the lender.
  • Payment Plan: The schedule of payments agreed upon by the borrower and lender to repay the debt.
  • Interest Rate: The percentage rate at which the debt accrues interest, if applicable.
  • Forbearance: A temporary suspension of payments or reduction in payment amount agreed upon by the lender to help the borrower repay the debt.
  • Default: A failure by the borrower to meet the terms of the debt settlement agreement, such as missing a payment or not adhering to the payment plan.


In conclusion, a debt settlement agreement is a legal agreement between a borrower and a lender to settle a debt for a minimum amount owed. This type of agreement is used when the borrower cannot fully repay their debt obligations and wants to negotiate a resolution with their lender.

The terms and conditions of a debt settlement agreement typically include the debt amount, payment schedule, interest rate, and consequences of default. It is important for both the borrower and lender to fully understand and agree to the terms outlined in the agreement before signing it. ContractsCounsel can help you draft the debt settlement agreement and guide you throughout the process.

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Debt Settlement Agreement

New York

Asked on Jul 15, 2023

Debt settlement agreement vs. bankruptcy?

I am currently in a difficult financial situation and am looking at my options to get out of debt. I am considering both a debt settlement agreement and filing for bankruptcy, but am not sure which option is best for my situation. I am hoping to get advice from a lawyer regarding the pros and cons of each option, so that I can make an informed decision.

Jeffrey Z.

Answered Aug 15, 2023

Bankruptcy is a very large part of my practice. I have had many clients that have attempted to use a debt resolution service without success. Unfortunately, they often pay a substantial amount of money to the service, their debts do not get resolved, they end up in bankruptcy anyway, and they do not get their money back. Aside from the difficulties in successfully completing a debt settlement agreement, there is also a tax issue. Forgiven debt is considered taxable income. You will receive a 1099 from any creditor that accepted a reduced amount to satisfy a debt. The result may be an income tax liability that you were not expecting. Debts that are discharged in bankruptcy are not counted as income.

Read 1 attorney answer>

Debt Settlement

Debt Settlement Agreement


Asked on May 18, 2023

What is a debt settlement agreement?

I am currently in a difficult financial situation and have been struggling to pay off my debt. I have been approached by a debt collection agency to enter into a debt settlement agreement, but I am unsure what this entails and what rights I have. Therefore, I would like to understand the details of a debt settlement agreement before I make any decisions.

Erik W.

Answered Jun 6, 2023

A debt settlement agreement allows you to pay a portion of the debt while the rest of the debt is charged off. Debt Collection Agencies typically want you to pay the amount agreed upon within 3 or 4 payments.

Read 1 attorney answer>


Debt Settlement Agreement


Asked on Jul 12, 2023

Debt settlement agreement due diligence?

I recently entered into a debt settlement agreement with a company and I am concerned about the due diligence that was conducted by the company. I am worried that I may have been taken advantage of and I would like to know if the agreement is legally binding. I would also like to know what options I have if the agreement turns out to be invalid.

Diane D.

Answered Jul 28, 2023

The only way to tell if your agreement is legally binding and what options you have is to have an attorney review it. However, if all the parties have signed the agreement, it is most likely legal.

Read 1 attorney answer>


Debt Settlement Agreement


Asked on Jul 30, 2023

When to use a debt settlement agreement?

I have recently been struggling to pay off my credit card debt, and I'm trying to find the best way to settle this debt. I am considering a debt settlement agreement, but I'm not sure when it is appropriate to use one. I understand that a debt settlement agreement is a legally binding agreement between a creditor and a debtor, and I want to know if this is a viable option for my situation.

Merry A.

Answered Aug 25, 2023

I only just saw your question - sorry you have been waiting since July 30, 2023! Whether a settlement agreement is your best choice is very fact-specific. In many situations, it's a good option if you can negotiate a far lower pay-off amount, but in some situations bankruptcy and a "clean slate" is the best option. Many legal servies/legal aid offices may offer free debt assistance -if it's not too late, I suggest that you contact such an office.

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Debt Collection

Debt Settlement Agreement


Asked on Jul 5, 2023

Creditor rights in debt settlement agreements?

I recently entered into a debt settlement agreement with my creditor, but I am worried that my rights may be violated during the process. I am concerned that the creditor may not abide by the terms of the agreement, or that they may not provide me with the full protections that I am entitled to under the law. I am hoping to get some clarity on my rights as a debtor in this situation so that I can protect myself.

Diane D.

Answered Jul 14, 2023

Without seeing the settlement agreement, there is no way to tell if your rights, or what you believe to be your rights, are covered. Also, if they don't abide by the contract, you can take them to court.

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