Copy of a Debt Reduction Letter

Both debtors and creditors can use the following information and the debt reduction letter provided further below. It’s for when you owe money to any parties and wish to enter into a one-off payment or when you have decided to accept a part payment as full payment of an account.

You may be wondering why would you accept a part payment as a full and final settlement. Sometimes businesses get into trouble and are looking at closing down or declaring bankruptcy.

This would mean that you could possibly receive no payment at all. Perhaps you may be dealing with a debtor, and if you go to court you may win. But you’ll have a hard time getting paid if they have no assets to sell or cash to pay with.

You may need to have a full payment now in a lump sum, rather than dribs and drabs and a long-drawn-out arrangement.

If you can afford it, accept a part of the debt as full payment of the account. This may be one method that could be beneficial to all parties, especially if there is a dispute. Often 50% of something is better than 100% of nothing.

I have a supplied a generic letter template further below for you to use. All you need to do is change the details for your debtor and the costs.

There are some very important points to note:

1. Only make a full and final settlement if you’re truly happy with this decision now and will be happy with it in the future. If you think in 6 months’ time you may be angry about it, then don’t do it.
2. Only accept a deal if you’re certain there’s no other way to get paid in full. Sometimes people use this method as a way of getting out of paying the full price. You can usually tell when a person is in genuine hardship as you can hear it in their voice. I would still suggest that they supply you with an assets and liability form prior to accepting any deal as there may be other ways to pay off the account. They could swap goods, work off the debt or barter.
3. If you’re in trouble and wish to use this debt reduction letter, you must never ever pay any account without first having the creditor sign the agreement. Verbal agreements off a debt reduction are rarely admissible if the person who agrees with your reduction now is not the same accounts person in a year. Without proof of that debt reduction deal, you’ll be legally responsible for the full balance, and can be pursued for up to 7 years. If the creditor signs the agreement, keep it on file in case they continue to chase you. It happens that new staff, new owners of the business see the account as unpaid – so written proof is paramount.

Other points to remember

If the debtor is a PTY LTD company…

Then you must remember to add the following clause:

“I, (put the directors name/s), being the Director of (the name of the company) Pty Ltd also hereby personally guarantee the full payment of this account in accordance with Letter of Agreement and its full Terms and Conditions.”

If you like, you can put this on your letterhead rather than having to fill in the creditor details, but make sure all the written details are the same.

Include all debtors

You can add as many debtors onto each account who owe the money, but make sure that you add the following clause:

“We agree that we owe the debt in total of $3830.00 jointly and severally.”

This means that all parties are responsible for ALL the debt together, so if one disappears you can make the others fully responsible for 100% of the account. This is important as often people perceive that they are only responsible for an equal share. Also, make sure all debtors must sign the agreement if there’s more than one debtor.

Include “signed without duress”

Most importantly, you need a clause that states: “signed without duress”

Duress means they were forced to sign. So, by signing without duress, it means they freely agreed to your terms.

Debt Reduction Letter template