How to write a debt settlement proposal letter (2024)

FAQs

How to write a debt settlement proposal letter? ›

Your debt settlement proposal letter must be formal and clearly state your intentions, as well as what you expect from your creditors. You should also include all the key information your creditor will need to locate your account on their system, which includes: Your full name used on the account. Your full address.

Include a paragraph explaining your circ*mstances and details of your financial situation that you want the creditor to take into account. Enter the amount which you can afford to pay. and I want to offer this as full and final settlement of the account.

You can send creditors debt settlement negotiation letters, but creditors won't lower the amount of your debt unless they truly believe: You're unable to pay. You haven't paid in awhile. You may file for bankruptcy, which could cancel your debt, if they don't settle.

Write a debt settlement letter to your creditor. Explain your current situation and how much you can pay upfront. Also, provide them with a clear description of what you expect in return, such as the removal of missed payments or the account shown as paid in full on your report.

You should look to include a provision that looks something like this: "Claimant and Employer hereby mutually release and forever discharge each other and each of their affiliates, subsidiaries, parent corporations and their respective agents, present and former directors, officers, executives, employees, predecessors ...

Some of these factors include the time since your last payment, the total amount owed, whether your account is with the original creditor or a collections agency, and how much you can afford to pay. Typically, you should offer 60% or less of your debt amount to kick off negotiations.

Although the average settlement amounts to 48% of what you originally owed, that number is a bit skewed. If your debts are still with the original creditor, settlement amounts tend to be much higher. You can end up paying up to 80% of what you owe if the debt is still with the original creditor.

Some will agree to settle your debt for as little as a third of the total, while others will try to get as much as 80% of the debt paid. You may choose to start your negotiation by offering to pay a low percentage of the total debt — such as around 25% — and negotiate from there.

The debt settlement company calls the borrower's creditor and negotiates a lump-sum debt payment of $20,000 to satisfy the previously required monthly debt payments of $10,000. The creditor, having written off the borrower due to non-payments for three months, accepts the lump-sum payment of $20,000.

What is a full settlement letter? ›

August 15, 2023 8 Mins Read. Full and final settlement is the process of calculating all the dues payable to an employee who resigns, retires, or is removed by the management.

What is a reasonable Full & Final Settlement Offer? There is no set figure that constitutes a reasonable offer because it entirely depends on your financial situation, and the creditor. Very low offers may be rejected but if you can offer a significant portion of the money you owe, it is more likely to be considered.

The bottom line

Debt settlement can be a viable option for those struggling with overwhelming debt, offering the potential for significant debt reduction and financial relief.

Legally, you must report all taxable income received — and this includes your debt settlement amount. If a 1099-C is issued to you, the IRS is also receiving a notice of income, and you can be penalized for not reporting. You'll have to pay not only the tax you owe, but also fines.

Offer a Lump-Sum Settlement

Some want 75%–80% of what you owe. Others will take 50%, while others might settle for one-third or less. If you can afford it, proposing a lump-sum settlement is generally the best option—and the one most collectors will readily agree to.

The California Rules of Professional Conduct mandate the prompt communication of written settlement offers, as well as verbal offers that constitute “significant developments.”