Release of Liability Meaning & Definition

What Is Release of Liability?

A release of liability is a clause in a debt settlement agreement that removes your future obligation to repay a debt. It applies after you've finalized the settlement agreement and paid your creditors the agreed-upon amount. 

During debt settlement, you—or a debt settlement company working on your behalf—negotiate with your creditors. The goal is to get your creditors to agree to accept a lower amount than what you owe to get rid of your debt. Once you both agree to and satisfy the terms, the release of liability means you don't owe your creditors additional money for that debt.

More on Release of Liability

You owe your credit card company $12,000, but because of an illness in the family, you now have large medical bills to pay. You decide to seek debt settlement, and you’re able to reach an agreement with your credit card company.

They agree to settle the debt for $7,000. The release of liability clause in your debt settlement agreement means you’re released from the remaining $5,000 liability. 

Let’s go over how release of liability works in a debt settlement agreement. 

Release of Liability: A Comprehensive Breakdown

Financial liability is your obligation to repay your creditors. If you take out a $10,000 loan, for example, you have a $10,000 liability, or obligation, to the lender you signed a loan agreement with.

A release of liability comes into play when your debt has been settled and you no longer have any remaining financial obligation for that debt.  

A release of liability may be a stand-alone document or part of a larger contract. The content of the waiver should be specific and customized to the situation. Every general release form should contain at least the following:

• Names and addresses of both parties. The contract should make clear who the release applies to, and specify the releasor (the creditor) and the releasee (the debtor). 

• Date. It’s common to include the date on which the agreement is entered near the names of both parties.

• Definition of terms. A section defining words in the contract is helpful so both parties understand the meanings of all legal terms used. This avoids ambiguity or different interpretations of the contract.

• Clear statement of release. A release of liability should include a statement that clearly outlines a statement of release. 

• Signatures. Every release of liability needs to include a signature block where both parties can sign and date the document. Some waivers may also require a witness signature, a notary acknowledgement, or both.

In debt settlement, the goal is to negotiate your debt down to a smaller sum than the amount you owe. If your debt is $10,000 and they agree to settle for $6,000, as part of that settlement, the lender should agree to a release of liability for the $4,000 that will be forgiven. 

From there, you wouldn't owe the lender any additional money. The lender would not be able to come after you for the remaining $4,000 you owed as per your original loan terms. 

A release of liability can also come into play during bankruptcy. When debts are discharged in bankruptcy, which is the goal of Chapter 7, there is a release of liability associated with them so that the debtor no longer owes any money.

Real-Life Examples of Release of Liability

• You file for bankruptcy and have a $5,000 unsecured loan discharged. You’re released from that $5,000 liability. 

• You owe $12,000 on your credit card and the creditor agrees to accept $8,000 in a series of six payments. In the settlement agreement, the creditor agrees to provide a release of liability for $4,000 when your last payment clears.