Debt Settlement Agreement

What Is A Debt Settlement Agreement?

A debt settlement agreement is basically a formal written agreement between a lender and a borrower for final settlement of his/her debt along with an interest amount that is payable. A debt settlement agreement includes agreement details of the amount borrowing, interest rate, payable amount, and the acceptance by the lender of the final settlement amount. 

In simple, a debt settlement agreement format can be used by a lender for the purpose of settling final dues that includes an interest amount or principal due. It can also be used for settling dues owed to private persons.

What Should A Debt Compromise Agreement Format Include?

Debt settlement agreements are mutually agreed documents that bind the lender and a borrower of a loan together. Moreover, banks and other financial institutions have their own format for a debt settlement agreement that are scrutinized by in-house Lawyers.  

Execution

• A debt compromise agreement must be printed on non-judicial stamp paper with a value of Rs 10. This can vary from state to state.
• It must be divided into 2 copies. Both lender and borrower must hold one copy of the original signed agreement for their records. 

One Time Settlement (OTS) Loan Scheme  

A one time settlement (OTS) is a loan scheme offered by banks and financial institutions to borrowers having difficulties in making payments as per loan terms and conditions. This scheme is offered only on genuine basis and banks will provide a short time within which the borrower can pay a reduced amount of the loan. Therefore, the balance or difference amount would be written-off by the bank.

How Will Debt Settlement And OTS Impact CIBIL Score?

After a borrower completes a debt settlement or one time settlement, he/she will no longer be approached by the bank for payment. But, whenever a bank or financial institution enters into a debt compromise agreement, the transaction is reported to CIBIL and the loan would show as written-off or settled. The CIBIL report is later viewed by other leaders as a sign of caution or negative behavior. 

The CIBIL score would be lowered by 75-100 points on the basis of late payments. CIBIL score is calculated on a period of 7 years based on the records of the borrower. Hence, all borrowers must also keep in mind the importance of CIBIL records and consider its impact when entering into a debt compromise or one time settlement with a lender. 

Merits Of A Debt Settlement Agreement

• Debt settlement agreements help you plan your monthly budget because it would invisible to your creditors list.
• Monthly payments will witness a fall as the debt settlement program would erase the interests and fees accrued on the outstanding amount. Over limit fees would also go down once you join the debt settlement program.

De-Merits Of A Debt Settlement Agreement

• Credit score from CIBIL will witness a fall. Debt settlements are reported by banks and financial institutions to CIBIL and other credit rating agencies, which, in turn, calculate your credit score keeping in mind this or any other such settlements. There are high chances that your application for any kind of loan or credit card in future may get rejected, as you will be considered less trustworthy in terms of debt repayment. 

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