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Debt Settlement Agreement

Debt Settlement Agreement

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Daniel Cohen
UpdatedJun 27, 2024
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    8 min read
Key Takeaways:
  • A debt settlement agreement is a form of contract.
  • A settlement agreement should contain eight facts, including a description of the debt, the amount owed, the original creditor, and any account numbers.
  • Make clear that the amount you pay brings the debt to $0 and closes the matter entirely.

Key Terms to Look For In a Debt Settlement Letter

What Are The Steps In Debt Settlement Negotiation?

Settling a debt, such as a delinquent credit card account, is a process you can learn and accomplish yourself. Or, you can hire a debt settlement company or lawyer who specializes in consumer law to do the negotiations for you. Even if you decide to hire someone else to negotiate for you, you should know the three steps you take to negotiate debt settlements.

First, we need to define seven terms because some words have precise meanings in this context. Not understanding these terms may harm you later.


A magic word for lawyers, original creditors, and collection agents that means, “A final resolution of the claim one party has against another.” A settlement amount can be for less than the balance owed. Note that settlement does not mean a collection agent can sell your account to another collection agent for additional collections. A settlement is final.

Creditors are not required to negotiate a settlement. It is your job to convince a reluctant creditor that a settlement is in their best interest.

Structured Settlement

A structured settlement consists of a pre-determined set of payments over a pre-set time.

Collection Agent

There are two types of collection agents: Those that work on a contract basis to collect a delinquent account; and those that buy accounts from original creditors. Collections agents must comply with the federal Fair Debt Collection Practices Act (FDCPA).

Original Creditor

The bank that issued the credit card, or medical provider that performed the service. Original creditors may not need to follow FDCPA rules, depending on your state of residence.

Collection Account

The rights to collect on a delinquent debt. It may seem counter-intuitive, but the rights to a delinquent credit card or medical debt are considered an asset. Like any other asset, collection accounts can be bought, sold, or traded. The sale price of a collection account is usually a small fraction of the account’s face value. However, the collection agent has the right to collect the account’s face value.

Terms & Conditions

The details in a settlement such as the amount, when, and who you will make a payment to.

Hard Limit

How much you can afford to pay in your settlement, according to an honest review of your household budget. Make sure you do not overspend on your settlement, especially a structured settlement, because failing to follow-through on a settlement now will make reaching a new settlement for the same debt later much harder.

The three steps to negotiating a debt settlement are:

1. Learn Who Owns Your Collection Account

Go to and find the name and contact information of your collection account.

2. Call the Collection Agent or Original Creditor

Collection agents buy credit card collection accounts for 4 to 8 cents on the dollar. Collection agents want to average about 11 cents on the dollar in collections — in other words, double their money. Therefore, start at about 5 cents on the dollar and work up from there in a series of offers and counter-offers.

Negotiation is a process. Don’t start with your final offer. Start low, and explain your situation in personal terms without becoming emotional. Listen to their arguments and answer them clearly. Your job is to convince them to see your side. Their job is to convince you to pay more. If you both play your roles properly, you’ll reach a settlement.

Original creditors are a bit different in several ways. You may need to wait for an original creditor is willing to negotiate a settlement. After you are 30 days or more delinquent on an account, the original creditor will begin collection calls which means, shortly, you will begin receiving marketing “settlement” letters with discounts from the creditor. This gives you notice your original creditor is ready to negotiate. Call the original creditor to begin negotiation with two specific “playing cards”:

  • Your hard limit, and
  • A reason for your not paying the debt

You need to explain your hardship, such as bad health, a loss of job or reduction in hours, or pending divorce. Original creditors will give a break to people who can justify their being in a financial hole. They are less likely to negotiate a settlement if you have no explanation for your not paying the debt.

Original creditors want more than collection agents who purchase collection accounts. Start with 40 cents on the dollar or a bit lower. If negotiations reach 60 cents on the dollar, discontinue them and try again in about four weeks.

Time Your Settlement Offer

Collection agents earn bonuses when they achieve monthly goals. The best time to get a deal is often close to the end of the month.

3. Get It In Writing

Once you reach an agreement on the telephone, ask the collection agent or original creditor to put your deal in writing. In law, the settlement is considered a contract that binds both you and the original creditor or collection agent. The other party can either send the agreement on their letterhead to you using the US Postal Service, or fax, or as PDF attachment in e-mail. All three are admissible in court, so someone using US mail, fax, or an attachment to send you a settlement letter are fine. The following terms and conditions should be included in a settlement.

  • Original creditor and collection agent’s company name
  • Date the letter was written
  • Your name
  • Your account number
  • Outstanding balance owed on the account (optional)
  • Amount agreed to as settlement
  • Terms and amounts of payments to be made (if not a lump-sum)
  • Date payments must be received to meet the settlement agreement
  • Magic words indicating the account is satisfied, such as
    • settled
    • settlement of this account
    • accepted as settlement in full
    • paid in full
  • Optional: Collections agent’s state-required disclosures
  • Optional: How this account will be noted in your credit reports at Equifax, Experian, and TransUnion
  • Reject if any of the non-optional terms and conditions are missing, vague, or unclear

What Payment Details Should I Worry About?

Remember your budget so that you do not overspend in your settlement. Also, if you negotiate a structured settlement, give yourself enough time to make each payment. Be prepared to walk away from bad deals or deals you cannot afford.

Get Your Credit Report to Show $0 Balance

Something that can sometimes be negotiated successfully is having the original creditor update their account line as “Paid/Zero Balance.” That reads better on your credit report than “settled” or “Paid/Less Than Owed.”

What If The Collection Agent Or Original Creditor Doesn’t Send A Written Settlement?

Written settlement letters serve as evidence of your promise to pay and the original creditor’s or collection agent’s promises to forgive the remainder of the balance and cease any future collections actions. Honest people have no reservations about putting their promises in writing. Honest collection agents and original creditors use form letters to dash off settlement letters in moments. Unscrupulous collection agents, however, use odd-ball excuses to avoid putting an agreement in writing. They may say doing so violates state or federal law, or is contrary to company policy. No laws prohibit settlement agreements, written or otherwise. Company policies are rules that can be changed, and have no force of law.

Some original creditors have policies where they do not send a settlement agreement to the consumer until the consumer makes a payment. Generally, you should have the attitude that if an original creditor or collection agent refuses to put a deal in writing, they are not willing to live up to the promises they make on the telephone.

However, if the original creditor is a major bank, then you can make a small exception to this rule. Major credit card issuers will say they will send a contract after receiving a payment. If they do not budge from that policy, open a new checking account at your bank or credit union. If you have a structured settlement, put the first payment into this special account. Authorize the original creditor to make a withdrawal from the new account. If the original creditor sends you a settlement contract, then continue to fund the account as agreed. If it does not send you a letter, then contact your state attorney general’s office, the FTC, and a lawyer in your state who has consumer law experience.

If you feel it necessary to send the collection agent or original creditor a letter following a successful telephone negotiation, use the following sample letter to a collection agent or original creditor as a guide. This is optional because you really want the collection agent or original creditor to send you a settlement letter on their letterhead.


Bills Action Plan

The cliche “get it in writing” applies to settlement letters. You need to see eight terms and conditions in a settlement letter, including the amount you promise to pay and when it is due. Avoid settlements that are vague or contain unclear terms. Some original creditors will insist on you making a payment before sending you a settlement letter.

Get rid of your debt faster with debt relief

Get rid of your debt faster with debt relief

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Or speak to a debt consultant  844-731-0836

Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Collection and delinquency rates vary by state. For example, in California, 11% have student loan debt. Of those holding student loan debt, 8% are in default. Auto/retail loan delinquency rate is 3%.

While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.