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Debt Settlement Agreement

2 signers
1 Creditor
2 Debtor
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Create a Successful Debt Settlement Agreement

It is difficult to collect an outstanding loan, and sometimes the people who borrow from you will not be able to repay you with the full amount. However, a Debt Settlement Letter will help you regain some of your losses even through a partial repayment when a debtor fails to pay his or her outstanding debt owed.
debt settlement agreement template

A Debt Settlement Agreement is a form of a contract entered by a debt collector and debtor for a client to settle a debt for less than the full amount that was owed. This type of contract is used when someone defaults on a loan, credit card, or medical bills because they are unable to pay the payments.

Depending on the circumstance, debt settlement agreement form offered by credit reporting agencies might range from 10% to even 50% of what you currently owe.

It is possible to reduce the settlement debt on your own or hire a debt settlement firm to do it for you.

This type of arrangement usually applies for over a period of 5 years, but can increase to 6 in some situations.

If the debt settle agreement is followed completely, the debts that it covers will be forgiven and the outstanding debt is absolved.

Why is a Debt Settlement Agreement important?

In most Debt Settlement Agreements, the debtor ends up paying merely a fraction of the outstanding present debt. As such, the debtor will be able to pay the amount sooner based on the governing law than if they had to make regular payments for the full cost of the debt or settlement amount. 

After the debt is completely paid, the debt collector or creditor reports the settlement to the credit bureaus for future reference. However, doing such will only minimally impact your credit score. Entering a Debt Settlement Agreement allows you to be free from your full debt for good. 

What should a debt settlement agreement template include?

After negotiating a debt settlement with a creditor, you must formalize the agreement in writing. Every sample debt settlement agreement must have the following information: 

  • The original creditor and the company name of the debt collector (parties involved)
  • The debtor’s full name
  • The debtor’s bank account number
  • The full amount of money owned (remaining debt or the debts owed)
  • The settlement amount that parties agreed to
  • The payment terms and the number of payments to be made to the debt collector, including the rate of interest
  • The due dates of the payments
  • Terms indicating that the amount will be satisfied completely when the settlement amount is paid
  • How will the account be outlined to the credit bureaus
  • Any disclosure needed by your state of residence 

Debt Settlement vs Bankruptcy

There are slim yet significant differences between debt settlement and bankruptcy, and each case is created to erase or forgive certain types of debt. Both debt settlement and bankruptcy may also affect your credit score.

However, personal bankruptcy usually falls into two types: straight liquidation of assets (Chapter 7) or reorganization (Chapter 13). Both chapters make use of the court system wherein a judge will ultimately decide on the outcome. It also becomes a public record.

On the other hand, debt settlement is usually a private matter. It involves someone representing the debtor, who can be an attorney or a law firm or a debt settlement company, and the creditors. Though it is reflected on the debtor’s credit report, it is usually a private transaction.

Once a debtor files for bankruptcy, creditors are legally mandated to stop disturbing him or her for money. However, during the debt settlement process, collection calls and mail demands may continue. Despite this, in a debt settlement, the debtor’s financial records will not become public record – offering the person some sense of privacy and making it easier for them to enter financial transactions in the future. Their current debt will not affect their future.

FAQ Regarding Debt Settlement Agreements

Usually, it depends on the amount the debtor can afford and what the creditor finds reasonable. Paying lump-sum may let you get away with a lower amount, but it is still important to gauge what is doable for you.
Yes, it is worth it to settle a debt so you will not be followed by debt collectors all your life. Paying your debt will also give you another chance to fix your credit score, especially if you plan to buy a house, car, or whatever would need you to loan.

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