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Updated on :  

08 min read.

Lending someone money, whether an individual or a company is always a risky affair. Due to the uncertainty in the movement of market forces, there is never a guarantee that you will get back the entire amount of the loan. Rather, in most cases, the recovery of the loan does not happen. The debtor usually finds himself in a fix at the time of repayment. However, this has led to the creation of the concept of “Debt Settlement”.

What is the Meaning of Debt Settlement?

Debt settlement is where a creditor gives his/her consent to forego a certain percentage of the outstanding amount. He agrees to settle at a reduced final figure of the total amount due. The Debt Settlement Agreement is a written agreement between a debtor and creditor where the debtor agrees to pay the creditor the outstanding debt due to him.

It is also known as the Debt Compromise Agreement. This agreement can be legally enforced by printing it on a non-judicial stamp paper, affixing the stamp duty as per the state laws, with the signatures of both the parties agreeing to it.

Contents of a Debt Settlement Agreement

  • Date of the agreement.
  • Name and address of the creditor.
  • Name and address of the debtor.
  • Original loan amount and its date.
  • Rate of interest.
  • Due date of the loan.
  • Final settlement amount.
  • Signatures of both parties.
  • Signature of the witnesses.

Merits of a Debt Settlement Agreement

  • For the debtor, the avoidance of court trials, for the most part.
  • For the creditor, a specified portion of the amount back is guaranteed.
  • The document, in itself, serves as evidence as and when needed.

Demerits of a Debt Settlement Agreement

  • Unfavourable terms in the Debt Settlement Agreement.
  • Late fees or interest may be inserted in the agreement.
  • It can lead to a negative impact on credit score.

Debt Settlement Agreement Template

Download Debt Settlement Agreement Template Here

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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