Debt Settlement Agreement Template – Free Download 2026

This Debt Settlement Agreement and Compromise and Release (the "Agreement") is entered into as of [____________] (the "Effective Date") by and between [____________] (the "Creditor"), whose address is [____________], and [____________] (the "Debtor"), whose address is [____________]. Creditor and Debtor acknowledge that Debtor is currently indebted to Creditor in the original principal amount of [$__________] (the "Original Debt"), arising from [____________] (the "Underlying Obligation"), plus accrued interest of [$__________] and fees of [$__________], for a total outstanding balance of [$__________] (the "Total Outstanding Balance") as of the Effective Date.

In full and final compromise of the Total Outstanding Balance, Creditor agrees to accept, and Debtor agrees to pay, the sum of [$__________] (the "Settlement Amount"), representing a reduction of [$__________] from the Total Outstanding Balance. The Parties agree that the Settlement Amount constitutes adequate consideration for the mutual promises set forth herein, and that this compromise is made in good faith to avoid the costs, delay, and uncertainty of further collection proceedings. Debtor acknowledges that the forgiven portion of the Original Debt, in the amount of [$__________], may constitute cancellation of indebtedness income reportable to the Internal Revenue Service pursuant to 26 U.S.C. § 61(a)(11).

Debtor shall pay the Settlement Amount to Creditor as follows: [lump sum of $__________ due on or before ____________ / installment payments of $__________ each, commencing on ____________ and continuing on the [____] day of each successive [month/quarter] thereafter, with the final payment due on ____________] (the "Payment Schedule"). All payments shall be made by [certified check / cashier's check / wire transfer / ACH electronic transfer] payable to [____________] and delivered to [____________]. Time is of the essence with respect to each payment under the Payment Schedule.

If Debtor fails to make any payment required under the Payment Schedule within [____] calendar days of the due date (a "Payment Default"), then, at Creditor's sole election and upon written notice to Debtor, this Agreement shall be void and of no further force or effect, and Creditor shall be entitled to pursue the full Total Outstanding Balance as if this Agreement had never been executed, with credit given only for amounts actually received from Debtor. All payments previously made by Debtor shall be applied to the Total Outstanding Balance and shall not constitute a waiver of any of Creditor's rights.

Upon Creditor's receipt of the Settlement Amount in full pursuant to the Payment Schedule and subject to the terms of this Agreement, Creditor hereby releases, acquits, and forever discharges Debtor and Debtor's heirs, executors, administrators, successors, and assigns from any and all claims, demands, actions, causes of action, liabilities, and obligations arising out of or related to the Underlying Obligation and the Original Debt, whether known or unknown, liquidated or unliquidated, fixed or contingent (the "Release"). This Release is effective only upon receipt of the full Settlement Amount and shall be void if a Payment Default occurs.

Following receipt of the full Settlement Amount, Creditor covenants not to institute, prosecute, or pursue any collection action, lawsuit, or other proceeding against Debtor with respect to the Underlying Obligation or the Original Debt. Creditor further agrees to promptly (a) provide Debtor with a written satisfaction of debt; (b) instruct any collection agency or attorney retained by Creditor to cease collection efforts; (c) request removal of any negative credit reporting related to the Original Debt; and (d) release and discharge any lien, levy, or garnishment related to the Original Debt. Creditor's failure to pursue collection shall not be deemed a waiver of Creditor's rights in the event of a Payment Default prior to full payment.

In addition to Payment Default as defined in Section 2.2, each of the following shall constitute an "Event of Default" under this Agreement: (a) Debtor's filing of or consent to a voluntary petition in bankruptcy or insolvency, or the filing of an involuntary petition in bankruptcy against Debtor that is not dismissed within sixty (60) days; (b) any material misrepresentation by Debtor in connection with this Agreement or the Underlying Obligation; or (c) Debtor's breach of any material term of this Agreement that remains uncured for ten (10) days after written notice from Creditor. Upon the occurrence of any Event of Default, this Agreement shall, at Creditor's option, be null and void, and Creditor may pursue all available legal and equitable remedies to collect the full Total Outstanding Balance.

In the event Creditor is required to enforce this Agreement or collect the Total Outstanding Balance following an Event of Default, Debtor shall be liable for all of Creditor's costs of enforcement, including reasonable attorneys' fees, court costs, and collection expenses. Interest at the rate of [____]% per annum, or the maximum rate permitted by applicable law, shall accrue on the Total Outstanding Balance from the date of the Event of Default until paid in full. Creditor's rights and remedies under this Agreement are cumulative and not exclusive of any other rights or remedies available at law or in equity.

The Parties acknowledge that the cancellation of indebtedness resulting from the settlement described herein may have tax consequences for Debtor under federal and state law. Pursuant to 26 U.S.C. § 6050P, Creditor may be required to file IRS Form 1099-C reporting the amount of cancelled debt if such amount meets applicable thresholds. Debtor is advised to consult a qualified tax advisor regarding any potential income tax liability arising from the forgiven portion of the Original Debt.

Debtor acknowledges sole responsibility for any and all federal, state, and local income taxes, penalties, and interest that may be assessed as a result of the cancellation of indebtedness under this Agreement. Creditor makes no representation or warranty regarding the tax consequences of this Agreement to Debtor, and nothing in this Agreement shall be construed as tax advice. This Agreement shall be governed by and construed in accordance with the laws of the State of [____________]. Any dispute arising hereunder shall be resolved in the courts of [____________] County, State of [____________], and the prevailing party shall be entitled to attorneys' fees and costs.