Incessant collection calls about outstanding debt can create a lot of financial stress. Fortunately, there are several ways to get relief. Debt settlement is one option to address debt and save money by offering a lump sum that is less than you owe.

A debt settlement letter is a proposal that can allow you to negotiate a reasonable and fair debt settlement. You can use this letter to negotiate a debt with a collection agency or original creditor by explaining your circumstances and clearly stating the amount you’re willing to offer. Use the debt settlement letter template provided below to improve your chances of acceptance.  

What Is a Debt Settlement Letter?

A debt settlement letter is a proposal where you offer a specified amount to a creditor to settle an account. In exchange, you ask the creditor to forgive the remaining debt, which can amount to as much as 50% of the original debt. The letter outlines why you can’t pay the full amount, how much you can pay and by when, and what you’d like in return.

The initial debt settlement letter you send opens the door to negotiations. Working through the process will allow both parties to come to an agreement and determine the terms of the settlement.

How To Negotiate Debt Settlement Through a Letter

Borrowers pursue debt settlement when they’re unable to pay off the full amount of unsecured debt they owe or are on the brink of bankruptcy. To bring a resolution, they offer 30% to 50% of the debt upfront in exchange for settling the account.

When negotiating a settlement through a debt settlement letter, here are the steps you’ll need to follow:

  1. Consider whether you want to hire a debt settlement company or work on your own.
  2. Don’t start the negotiation process before sending a debt validation letter to confirm the balance you owe. 
  3. Start saving the amount you plan to propose as a settlement.
  4. Write a debt settlement letter explaining your financial situation and how much you can pay.
  5. Ask for a written confirmation of the agreed terms.
  6. Send the agreed payment to the creditor.
  7. Monitor your credit report to ensure the account is correctly marked as per the terms of your agreement.

What Are the Legal Implications of a Debt Settlement Letter?

For some, debt settlement is unavoidable when bankruptcy is a threat. However, before you send a debt settlement letter, it’s important to understand the risks associated with it. You’ll need to stop making payments toward the debt during the process, which can lower your credit score.

Any settled debts will also stay on your credit report for seven years. It’ll be very challenging for you to get access to loans and credit cards during that time. Any amount that the lender forgives is considered income, and you’ll owe taxes on it, so seek legal advice before you send the letter.   

Pros and Cons of Writing a Debt Settlement Letter

Debt settlement letters may allow you to resolve a debt, but they also have a few drawbacks.


  • If you’re facing financial hardship, a debt settlement letter may improve your financial position.
  • You may be able to avoid bankruptcy by settling your debt.
  • You may be able to save up to 50% when you settle an account.
  • Once your account is settled, you’ll no longer have to deal with collection calls.


  • Creditors are not obligated to accept your proposal.
  • If you don’t reach an agreement, you’ll owe more due to the late fees.
  • Debt settlement can lower your credit score, making it difficult to get credit.

How To Write an Effective Debt Settlement Letter

When writing a debt settlement letter, it’s important to be upfront and direct about what you can offer and what you expect in return. Your letter must also convince the lender that you can’t pay the full amount you owe. You may need to explain your situation in detail to achieve this. 

Avoid divulging too much information about your financial or personal situation. Only provide enough information to support your settlement negotiations.

If you’re using professional debt settlement, they’ll be able to send a letter on your behalf. If you’re negotiating on your own, use the sample letter below to help you write a persuasive letter. Ensure you include the key elements listed below in your letter:

  • Your full name, address, and contact details
  • Name of the original lender
  • Account number
  • The total amount you owe
  • Name and information of the collection agency
  • The amount you’re offering for settlement
  • A clear request to mark the account paid
  • A date by which the creditor must respond
  • A date by which you’ll make the payment if your offer is accepted

“The key is to be patient,” says Teresa Dodson, founder of Greenbacks Consulting and debt expert. “The first settlement proposal may not get accepted, but don't give up. Be persistent and follow through,” Dodson encourages. 

What To Avoid in a Settlement Letter

When negotiating a settlement with a lender, a simple mistake can cost you money. Before you write a settlement offer letter, learn about these common pitfalls:

  • Not validating debt: Don’t commit to making a payment unless the debt collection agency can confirm the amount you owe. 
  • Contacting lenders too soon: Don’t send a debt settlement letter before your account is at least 3-6 months delinquent. Lenders are not likely to consider settlement that early.
  • Not getting the terms in writing: Don’t make the payment unless you get the terms of the settlement in writing.
  • Agreeing to monthly payments: Don’t agree to monthly payments because you may end up paying more for late fees if you miss payments on the negotiated amount.

Debt Settlement Letter Example

Here’s an example of what a debt settlement letter looks like. You can use this debt settlement letter template and personalize it to negotiate with a lender.

[Your full name]

[Your address]

[Your contact information]


[Creditor or collection agency’s name]

[Creditor or collection agency’s address]

Dear Sir/Madam,

This letter is in regard to the account (account number) for which you’re claiming payment of (debt amount). I’m writing to let you know that I’m unable to pay the full outstanding balance due to (explain your financial situation here). However, I’d like to come to an agreement about the outstanding balance.

I can offer (the settlement amount you’re proposing) as a full and final settlement of this account. In return, I request you to report the account as “paid as agreed” or “paid in full” to all three credit bureaus. Upon payment of the proposed amount, you’ll also release me from any further liability regarding this debt.

I can pay the amount offered within (the time frame in which you can pay) once I have received a written agreement of your acceptance. Please notify me of your decision by (date by which you want the creditor to respond).


[Your name]


What To Expect From Creditors (And How To Answer Back)

After sending your letter, the creditor or collection agency may take a few days to review the proposal. If you’ve sent the letter when your account is 60 days past due, the creditor will reject it immediately. The best time to send the letter is when you’re already 6 months past due and your account is in a charge-off status with a collection agency. 

If they accept your proposal, you’ll receive a written confirmation. Only send the payment once you receive the debt settlement agreement in writing.

Creditors are not obligated to accept your debt settlement proposal. They may reject the proposal outright or send you a counteroffer. You can then decide to accept their offer or send your own follow-up letter with a different amount.

Resolving a Debt With a Debt Settlement Letter

A debt settlement letter can help you resolve a debt, save money, and get relief from debt stress, but it’s not the only option. Consider all your options, including a debt management plan and debt consolidation. If you determine that debt settlement is your best option, ensure that your letter is clear and persuasive to improve your chances of receiving a favorable reply.

Use the template provided above to clearly state how much you’re offering and why. Once the lender agrees to the proposal, you’ll need to send them the agreed amount by the date you specified.