How to Write a Debt Settlement Letter

If you want to settle credit cards or other debts you'll need to know how to write a debt settlement letter. This is a written proposal you send to creditors to ask them to accept less than the full amount owed. If they accept your offer, you make the payment and the rest of the debt is forgiven. 

Putting your request in writing creates a paper trail that protects you in case the settlement details are disputed later. When used correctly, debt settlement letters can be an effective way to resolve unpaid debts so you can move on with life. 

Knowing what to include in a debt settlement letter could improve your chances of your offer being accepted. Read on for a comprehensive debt settlement guide.

What Is Debt Settlement?

Debt settlement simply means negotiating debt balances to pay less than what’s owed. Debt relief is another name for debt settlement. You may also hear the terms debt negotiation or debt resolution when discussing this approach to managing debt. 

In a debt-settlement negotiation, you ask your creditors to accept less than the balance due on a debt. If the creditor agrees, the remaining amount is forgiven. You could pay a debt settlement in a single lump sum or in a series of structured payments. The types of debts that creditors may be willing to settle include:

• Credit card balances

• Store card balances

• Unsecured personal loans or lines of credit

• Medical debt

Generally, debt relief is only an option for unsecured debts not attached to any collateral. That’s because when there is collateral, creditors can take possession of it to recover what you owe. For example, if you don’t pay your car loan, the creditor could repossess the car and sell it. Certain debts, such as federal or private student loans, are not negotiable and are difficult to discharge in a bankruptcy filing.

How Does Debt Settlement Work?

Debt settlement is a reasonably straightforward process. If you’re interested in eliminating debts this way, here's an example of how credit card debt relief works.

• Decide who will negotiate. Debt relief services will handle debt settlement negotiations for you, typically in exchange for a fee. If you’d prefer to save money on costs and are comfortable with negotiating, you could opt to negotiate your own debt instead of using a debt relief program.

• Set aside money to settle. Settling debts requires you to have cash on hand to pay your creditors. For that reason, you may want to open a separate savings account to hold funds for debt negotiation and set up automatic monthly deposits. 

• Stop paying debts. It’s hard to set aside money each month when you’re also struggling to pay all your bills. For that reason, most people pursuing debt settlement stop paying their creditors. Stopping payments also sends a clear signal to your creditors that you’re in financial distress. Creditors are typically unwilling to settle current debts. The more your debt is past due, the more amenable a creditor might be to a settlement. Keep in mind, however, that late payments are likely to deliver a severe blow to your credit scores.

• Draft a debt settlement letter. When you’re ready to negotiate, you’ll send a debt settlement letter to each of your creditors. This letter should explain how much you’re offering toward the debt and why you can’t afford to pay in full. You can also make specific requests about how the settled debt should be reported to the credit bureaus.

• Make payment. Assuming your creditor accepts your debt settlement offer, the final step is arranging payment. You’ll want to ask for written confirmation of the agreement before sending payment, as well as verification that it’s been received once sent. 

• Check your credit reports. Following a debt settlement negotiation, it’s essential to monitor your credit to ensure the account is being reported correctly, according to the terms of your agreement. For example, the account may show up as “settled," “settled as agreed," or “paid as agreed," depending on what you work out with the creditor. 

Why You Need a Written Agreement

A written letter ensures that you and your creditor are on the same page about the terms of the settlement and gives you proof of what you agreed to. That protects you during and after the negotiations in case the creditor tries to change or dispute any details. Debt settlement letters also help the creditor if you don't stick to your end of the bargain. 

Say you agree to pay $3,000 of a $5,000 debt. Your settlement letter says you'll pay three $1,000 installments over the next six weeks, at two-week intervals. You make the first payment, then miss the second. The creditor could call off the settlement and sue for the full balance due, since you didn't meet the terms of the written agreement. 

Here are some tips for getting a written debt settlement letter:

• Request that the letter be sent from a verifiable source, whether it's a physical letter printed on company letterhead or an email from a corporate account. 

• Review the details of the letter to make sure any terms you agreed to verbally are still accurate. 

• Talk to a debt expert or attorney about the contents of the letter if you have any questions, before you sign it. 

How to Write a Debt Settlement Letter

A good debt settlement letter should be concise, thorough, and convincing enough to get a creditor to agree to your terms. Your letter should include some specific information about you and your debts. Here's a checklist of what to add:

• Personal details. You'll need to add your name, address, and phone number. 

• Creditor details. Your letter should name the creditor (or debt collector) and include their address and phone number. 

• Account information. You'll need to share your account number and the balance owed, according to the most recent statement or collection letter you have. 

• Settlement amount. Tell the creditor how much you want to pay toward the debt. It's better to start low, since that leaves room to increase the amount if the creditor makes a counteroffer.

• Settlement terms. After the amount, you'll tell the creditor how you plan to pay. For example, you might pay in a single lump sum or split the amount into several smaller payments. Include dates for when payments will be sent or a timeframe for how far apart payments will be made. 

• Final agreement. Clarify that acceptance of the settlement means you've satisfied the debt and that any leftover balance will be canceled. 

• Credit reporting. You can ask that your creditor report the debt as "paid in full,” "settled in full,” or "settled for less than owed" on your credit reports. 

• Disclosures. If your state law requires certain disclosures be added to a debt settlement letter you'll need to include those. 

You can also include a section to make a case for why the creditor should accept a settlement.

For example, if you’ve been unable to pay your credit card bill because of a job loss, you can briefly explain the financial hardship to your creditors. If you can provide evidence of hardship, like a termination letter or bank deposits showing that your only income is unemployment benefits, that can help to strengthen your case. 

The most critical part of your debt settlement letter is the offer itself. The amount a creditor is willing to accept for an unpaid debt can depend on several factors, including:

• How past due you are on payments

• The original balance

• The current balance, including interest, fees, and penalties

Depending on the circumstances, asking for a 30% to 50% reduction may be appropriate. So if you’re trying to settle a $5,000 debt, you might offer anywhere from $1,500 to $3,500 as payment. Remember that you should be prepared to pay whatever amount you’re offering if the creditor accepts. 

Your debt settlement letter should include your mailing address, so the creditor has a way to respond to you in writing. You can negotiate debt settlement over the phone but the final step should always be to get it in writing. A written agreement protects both sides from future disputes.  

Debt Settlement Letter Template

If you need more detailed instructions for writing your debt settlement offer, you can use this template as a guide:

[First and last name]

[Home or mailing address]

[Telephone number]

[Date]

[Re: Account number XXXXXXXX]

[Creditor or organization name]

[Creditor address]

To whom it concerns:

I’m writing regarding the account number referenced above, which has a current balance of $XXXX.XX. I cannot pay the amount in full due to financial hardship. [Here, you can add the details of the difficulty.]

I would like to make a debt settlement offer in the amount of [$XXXX] as the final payment for this account. In return, I request that the remaining balance be forgiven and the amount marked as “paid in full” with the credit bureaus. 

If you’re willing to accept this offer, please send written confirmation to the address listed above. Once this confirmation is received, I will make the payment above within [XXX] business days via [your preferred payment method].

I look forward to your prompt response. 

Sincerely,

[Your printed name]

[Your signature]

Using sample debt settlement letters

If you can’t think of what to say in a settlement letter, there’s no need to worry. A debt settlement template will help you structure the letter. In addition to suggesting the words you can use, it will help you determine if the tone is right. 

Working from a debt settlement template is great, but what’s even better is making it your own. Customize the letter to fit your personal situation. For example, if you’ve gotten behind on bills due to illness or a job loss, let the collection agency know. Allowing your circumstances to shine through makes your proposal feel genuine. Don’t forget, there’s a real-life person reading your letter, someone who has undoubtedly faced their own challenges. Personalizing your letter is a good way to connect with that person. 

Settling debt is about coming to an agreement that works for all parties. The creditor will be happy to have the debt of its books. More importantly, it will be off your books and you can look forward to your financial future with confidence.

What to Expect After Sending a Debt Settlement Letter

You’ve sent off your debt settlement letter. Now is the time to take a deep breath and wait to learn what the creditor decides. Although creditors and collection agencies are not required to accept your offer, you’ve still made a strong move. After all, you’re actively moving toward resolution.

After sending a debt settlement letter, one of four things can happen:

• The creditor accepts your debt settlement offer.

• The creditor rejects your offer.

• The creditor makes a counteroffer.

• You may hear nothing. If that’s the case, don’t panic! Creditors and collection agencies have a lot going on and it may be they just haven’t had time to get to your case. Now’s a good time to follow up with another email, letter, or phone call. 

If your offer is accepted, you can move ahead with paying the agreed-upon amount. However, if the creditor rejects your offer, there may not be much more you can do other than wait a little longer and try again. Keep in mind that the creditor can continue to contact you about paying the debt and even pursue a lawsuit against you until an agreement is solidified. 

In many cases, the creditor will make a counteroffer. So if you offered to pay $2,500 toward a $5,000 debt, for example, they might counter with $3,200. A counteroffer is a good sign, as it indicates the creditor is willing to settle. You just have to find the right amount for an acceptable settlement on both sides. As you work through the process:

• Stay positive! You’re doing a good thing for yourself and your personal finances.

• Stay organized. The more organized you are with emails, letters, and phone calls, the easier it will be to know for sure you’re on the same page as the collection agency. 

Pro tip: Keep careful notes of all phone calls, including who you speak with, what they tell you, and how you respond. 

What to do if a creditor won't provide a written agreement

It's possible that after you come to a verbal agreement about debt settlement, a creditor will back off from putting it in writing. Or they may say they'll only send the written agreement after you pay. Here's what you can do if that happens.

• Repeat your request for a written letter, either on paper or by email. Be polite but firm, and let the creditor know you won't pay without an agreement in hand. 

• Offer to write a debt settlement letter yourself. Be sure to include all the relevant details and stick to the exact terms you agreed on. 

• Stand your ground. If the creditor tries to push back or resist a written agreement, think carefully about whether you want to go through with payment. And if a creditor tries to renegotiate, tell them that you are only willing to agree to the original terms. 

Is Writing a Debt Settlement Letter Worth It?

Attempting a debt settlement negotiation can have its advantages and disadvantages. Whether it makes sense to write a debt settlement letter can depend on your situation and goals. 

Making a debt settlement offer could be right for you if you:

• Are significantly past due on unsecured debts

• Want to get rid of those debts as quickly as possible—ideally, for less than what’s owed

• Have cash on hand to pay settlements to creditors

• Want to avoid creditor lawsuits or a bankruptcy filing

• Don’t mind the hit to your credit scores

• Would like to save money on fees by doing debt negotiation yourself

Perhaps most importantly, you have to be comfortable negotiating with your creditors. If you get cold feet at the thought of asking your creditors for a deal yourself, then you may want to find a professional debt relief company to work with instead. Learn how Freedom Debt Relief works to help you lift the burden of debt.

As for the downsides of making a debt settlement offer, your credit scores will likely drop. But your scores can recover over time if you’re practicing good financial habits like paying bills on time. It’s also worth noting that creditors are not obligated to accept your debt settlement offer. So if a creditor refuses, you may have to seek other options for managing the debt.