How to Write a Debt Settlement Letter

Debt Settlement Letter
BY Rebecca Lake
Nov 9, 2022
Key Takeaways:
  • It is possible, under certain circumstances, to pay your creditor less than what you owe.
  • A debt settlement letter is a crucial part of the negotiation process.
  • Learn how to write an effective debt settlement letter.

Debt settlement can allow you to pay off debts for less than what’s owed. You can hire a debt-relief company to negotiate a debt settlement on your behalf. Or you can contact your creditors directly to work out an agreement instead. 

If you’re negotiating debts yourself, writing an effective debt settlement letter is a crucial part of the process. A well-written letter should outline the details of the debt-settlement offer you’d like to make—and why it’s in your creditor’s best interest to agree to the terms. 

Knowing what to include in a debt settlement letter can improve your chances of your offer being accepted. 

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” used 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 may 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 creditors can take possession of collateral to recover unpaid balances owed on secured debts. 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 are the key steps:

  1. 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 may opt instead to make a debt-settlement offer yourself. 

  2. 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. 

  3. Stop paying debts. Generally, creditors are unwilling to settle current debts. So if you’d like to negotiate debts, you’ll need to stop paying them. The more your debt is “past due”, the more amenable a creditor might be to a settlement. Keep in mind, however, that late payments can deliver a severe blow to your credit scores.

  4. 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.

  5. 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. 

  6. 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. 

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. When drafting a debt settlement letter, you’ll want to include basic information, including your name and account number. Next, you’ll outline why you’ve fallen behind on the debt. 

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, 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 may offer anywhere from $2,500 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 also include your mailing address, so the creditor has a way to respond to you in writing. You can also attempt a debt-settlement negotiation over the phone. Still, it’s better to have a paper trail of all communications between yourself and the creditor, in case something is disputed later. 

Debt-Settlement Letter Template

If you need more detailed instructions on how to write your debt-settlement offer, you can use this template as a guide:

[First & last name]

[Home or mailing address]

[Telephone number]


[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. 


[Your printed name]

[Your signature]

What to Expect After Sending a Debt Settlement Letter

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

  • The creditor will accept your debt-settlement offer.

  • The creditor will reject your offer.

  • The creditor will make a counteroffer.

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. 

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 debt-relief company to work with instead. 

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.

Frequently Asked Questions

What should I include in a debt settlement letter?

When writing a debt settlement letter, be sure to include the following:

  • Your name and address

  • The account number and balance

  • Your creditor’s name and address

  • The proposed settlement amount

  • Any specific requests regarding the creditor’s response time or how a settled debt will be reported to the credit bureaus

Maintain a copy of this letter for your records and consider sending it via certified mail to ensure it’s received. 

How much should I offer to settle my debt?

The amount you can offer during debt negotiation can depend on the age of the debt, whether you’re negotiating with the original creditor or a debt collector, and how much you can afford to pay. The older the debt is or the more in danger you are of filing for bankruptcy, the more of a discount the creditor might be willing to offer to avoid a total loss. 

Does offering to settle restart the statute of limitations for debt?

Yes, acknowledging the debt or offering any payment, either full or partial, restarts the statute of limitations. That can open you up to creditor lawsuits until the debt becomes time-barred.