Letter proposing to settle a debt

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What's a letter proposing to settle a debt and when do you need it?

You should use this letter if your business owes a debt to another business and you want to propose a way to settle the debt.

Your proposal is likely to be different to the terms of payment that you are contractually obliged to follow, and is most appropriate where you and your creditor (the business you owe the money to) have already agreed what’s acceptable. Now, you want to record your intentions in writing – which is highly advisable.

The starting point in law is that a new agreement for the payment of a debt that is already due is not legally binding, unless it is supported some other new terms.

To make it legally binding, you would need to either have some incentive for the creditor (e.g. an additional amount that you pay as debt extension fee), or you’d both agree to sign our separate deed of variation of debt payments template, which you may well prefer to do.

So if you get a positive confirmation from your creditor in response to this letter, our experts recommend that you put in place that deed of variation of debt payments as soon as possible.