A debt settlement letter outlines an agreement between you and your creditor or debt collector to pay less than the amount you owe in exchange for having the debt forgiven. If you’re distressed about debts that you can’t afford to repay, it’s no wonder you’re thinking about debt settlement as an answer.
It’s a nice idea: you can simply mail your creditor and collector and ask for a discount on your bill. Of course, the reality is more complex—but it is doable.
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Before you download these debt settlement templates
We offer debt settlement letter template downloads here. But before you download and customize these letters, it’s important to know what you’re getting into, especially if you’re dealing with a collections agency.
If you’re dealing with a collections agency
If you’ve recently been contacted by a debt collection agency (within the past 30 days), it’s time to get into gear and force them to prove that you owe the debt. Never take ownership of or settle a debt you don’t owe.
To avoid that, follow these steps:
- Request a debt validation letter: By law, debt collection agencies are supposed to send you a debt validation letter within five days of contacting you. If they haven’t yet, request one to get details about how much money you owe, which creditor they’re representing, and what your rights are. If it turns out that you do owe this debt, you can skip the next steps.
- Send a debt verification letter: If the validation letter seems fishy, send a debt verification letter disputing the debt within 30 days of receiving it. (If you wait beyond that point, the debt is assumed to be yours, and you lose a lot of the legal protections that would otherwise have applied when you disputed it.)
- Review the collector’s response: The debt collector is legally required to respond to your debt verification letter and must provide you with more information about the debt.
Downloadable debt settlement letters
How much should I offer to settle a debt?
To propose a settlement agreement, you should consider offering at least 30% of what you owe.
The exact amount your debt collector will settle for depends on how much you owe and how old your debt is. However, a 2018 report found that on average, consumers were able to settle their debt by paying less than 50% of the amount they originally owed. 1
You can hire a debt settlement company to help settle your debt
Working with a debt settlement company can make the settlement process less stressful, but they generally charge a fee (around 20%–25% of your settled debt). 2 Note that there’s nothing a debt settlement company can do for you that you can’t do yourself.
Can I request pay for delete?
As you may have noticed, the debt settlement letters above request that the creditor or collector update your credit report to say that the debt has been paid in full. You may have seen other letters that request they remove the negative mark from your credit report entirely (a negotiation strategy known as pay for delete). If you’re wondering how these strategies are different or which you should use, here’s how to think about it.
On your credit report, if your settled debt is:
- Reported as settled: This will still hurt your credit, but it’s better than not paying at all. This is the easiest outcome to achieve when you propose a debt settlement.
- Reported as paid in full: While this is better than a debt being reported as settled, it’s not as good as a complete removal, at least in the main VantageScore and FICO scoring models that are most widely used by lenders. This is an unlikely outcome.
- Removed entirely: This is the best possible outcome as far as your credit is concerned, but it’s extremely unlikely.
Creditors and collection agencies are required by law to report accurately to the credit reporting agencies. So if you’re asking for your debt to be labeled as anything but settled, you’re not only asking to pay less than you owe, you’re also asking them to fudge the facts. Bear this in mind during your negotiation—while your creditor or collector may be desperate to recoup your debt, don’t be too greedy if they’re not willing to budge when it comes to your credit report.
The upshot is that you can request pay for delete when you ask for a debt settlement, but it’s unlikely to work. However, you can give it a try with the following pay for delete letter templates:
How to write a debt settlement letter (with examples)
A good debt settlement letter will ask your creditor or debt collector to empathize with you regarding the financial hardships or honest mistakes that resulted in your unpaid debt. Here’s an example debt settlement offer letter with an explanation of how to write each section, what it should say, and why it’s needed.
Debt settlement letter example
The following is a debt settlement letter example written to a creditor. A debt settlement letter to a collector is very similar.
In the debt settlement letter above, the writer experienced a sudden layoff that caused them severe financial hardship, leading to unpaid debts. However, there are other good reasons you might not have been able to pay back your debts.
Other reasons for having unpaid debts
Here’s some language you can copy and paste into your debt settlement letter template if any of these situations apply to you:
A medical emergency
Any sort of medical emergency can cause unexpected budgetary stress. Say this in your letter:
I recently suffered a major medical emergency that cost me most of my savings. Unexpected medical bills prevented my from paying my debts during this difficult time.
Going through a divorce can be extremely stressful, and if the process involves costly legal proceedings or a financial settlement, it can put a real strain on your budget. A divorce can even affect your credit by making it hard to stay on top of your bills. Explain this with the following language:
I recently went through a stressful and financially draining divorce that caused me to miss payments. Now, post-divorce, I hope to settle my debts, rebuild my life, and restructure my finances.
Relocating to a new home can be overwhelming. It’s easy for important messages (such as bills from your creditors) to fall through the cracks if you weren’t able to get all your mail forwarded to your new address.
I recently moved to a new address for [your reasons here]. Unfortunately, some wires got crossed and my address didn’t update properly, leading me to miss payments. While I take full accountability for this, the move also drained my savings and used up my income.
A birth or death
If you recently became a parent—or if someone close to you passed away—it’s understandable if staying on top of your bills wasn’t the first thing on your mind. Sometimes, these events happen suddenly (making it hard to plan for them), and can be accompanied by expensive medical bills.
Birth: I was recently blessed by the birth of my child. As you can imagine, we also faced a steep increase in medical bills, necessities, and stress, causing me to miss payments.
Death: Unfortunately, my father recently passed. The cost of the funeral drained my savings and the emotional toll of losing my father caused me to miss payments I’d otherwise have paid responsibly.
Disruption caused by COVID-19
If you laid off, were hit with expensive medical bills, had to quit your job to provide childcare, or were affected some other way by the COVID-19 pandemic, mention that prominently in your settlement letter. Millions of people are in very similar situations, and there’s a reasonably good chance your creditor or debt collector will be sympathetic and willing to work with you.
The language you should use depends on the type of disruption you experienced.
What to do after writing your debt settlement letter
Once you’ve drafted your letter, you’ll need to:
- Attach documentation: Creditors may ask for evidence of your hardship. Sending evidence right away backing up your claims may give you more credibility. (This is also a good reason not to exaggerate or lie in your letter.) For example, you could send copies of hospital bills or a notice of termination from your company.
- Send your letter via certified mail: Send your letter to your creditor or collector’s address, which will usually be listed on your credit report or on their company website. Use certified mail and pay for a return receipt.
- Await a response or follow up: Creditors and collection agencies aren’t obligated to respond to letters, so you may have to follow up with them a few times. It’s also possible they’ll promptly send a counter-offer, so monitor your incoming mail carefully.
Debt settlement counter-offer letters
Your creditor or debt collector might not agree to your initial settlement offer but they may be willing to negotiate with you. In this case, you can make a counteroffer to their proposal for a lower amount.
Pros and cons of debt settlement
It’s important to consider the pros and cons before sending a debt settlement letter:
- Clears your debt: A debt settlement letter can prevent you from sliding further into debt, which is a serious concern. Your debt continues to accrue interest even if it’s been charged off and sold to a debt collection agency. Depending on the state you live in, they may even have the right to raise your interest rate if the original agreement with your creditor gave them that right. 3
- Minimizes impact on your credit score: Settling a debt puts you on a path to rebuilding your credit, although it won’t be a fast journey.
- It’s not a guarantee and can get costly: Your creditor or debt collector isn’t obligated to accept your debt settlement offer. If you aren’t able to reach an agreement quickly, you may end up owing more than you originally did due to the accumulation of missed payments and late fees. Working with a debt settlement company will also cost you various fees with no guarantee of success.
- It’ll hurt your credit score: Settling debt hurts your credit more than paying it off in full, although it’s still better than not paying it at all. If you have settled debt bringing down your credit score, it’ll be more difficult to apply for a new credit card, secure a loan, or rent an apartment until you rebuild your credit.