Firms and individual consumers may use the Debt Forgiveness Letter to forgive debt owing or request that debt is forgiven, respectively. Many situations may trigger a Debt Forgiveness Letter. We will review some of these situations and provide guidelines and templates for preparing a letter of this type.
What is a Debt Forgiveness Letter?
A debt is funds owed by one party to another. In many cases, it is money owed by a consumer to a business, however, it can also be between business entities. If a business feels that it is no longer in their best interest to continue trying to collect a debt, they may prepare a Debt Forgiveness Letter to send to their client. Some of the reasons can include:
- It is a trivial amount
- The debt collection jeopardizes the business relationship which they want to maintain
- There may be tax reasons to write off the debt vs. continue trying to collect
Consumers also find themselves in a position where they are unable to repay the debt they owe. Rather than ignore the company they owe money to, it may be worth their while to send a Debt Forgiveness Letter request. Reasons to send such a letter can include:
- Bankruptcy
- Military deployment
- Jail term
- Divorce, death in the family
- Failed business ventures
- Work relocation
- Medical bills
- Insufficient income
Note: Regardless of the reason, debtors making such a request should expect that they will still be liable for a portion of the debt, their credit rating may be impacted, and they may be unable to accrue debt in the future from this business.
How to Write a Debt Forgiveness Letter?
The Debt Forgiveness Letter should follow a standard format that includes the reason the debt is being asked to be forgiven, be professional, and should be no more than one page in length.
The tone of the letter is also important, and it depends on who is sending the letter and the reasons it is being sent.
For example, if you are writing off the debt for tax reasons and want to retain this customer for future business, your letter should be friendly and informative. You should emphasize that while you would accept additional orders from the customer, you may not extend the same credit limits to the customer. A lot depends on the circumstances of the relationship.
If you are a debtor and asking for debt forgiveness, recognize that you are at the mercy of the creditor. It is up to them whether they accept your request or send your debt to a debt collector. Be polite and respectful, avoid showing signs of anger even if it is due to a disagreement. In many cases, the creditor will be open to accepting a proposal of partial repayment. For example, proposing to repay 30% in some situations might be sufficient.
What to Include in a Debt Forgiveness Letter?
Items to include in the Debt Forgiveness Letter vary depending on the exact situation. Your letter should be customized to the amount of debt, your situation, and that of the creditor. Your letter should address the following:
- A reason for being unable to repay the debt
- The debtor’s current financial status
- Your current capacity to repay the debt
- Proof of your hardship situation
- Include other viable alternatives dependent on the situation
- Standard information such as
- Creditors full name and address
- Debtors full name address
- Debt information – amount, contract number
- A proposal or call to action
- Always use a formal business letter format
- Make it short, 3 or 4 short paragraphs
- Maximum of one page in length
- Always proofread your debt forgiveness letter
- Keep your tone positive
- Avoid using aggressive or offensive language
- Use a professional format and tone
- Be polite and respectful
- Retain a copy of the letter for your records
Remember that you want the creditor to accept your proposal, and you may want to do more business with the creditor or the debtor in the future. If you are a debtor, you also want to avoid negative reports against your credit rating.
Template (Debtor asking for Forgiveness of a Debt)
(Debtor) Your Name, address, and Phone number
Date
Creditor) Name of the person the letter is addressed to, company name, address, phone number
Salutation
Body – Paragraph 1 – Introduction
Body – Paragraph 2 – Describe details of the debt
Body – Paragraph 3 – describe details of the debt proposal
Closing
Signature
More Details – Debt Forgiveness Letter (Debtor asking for Forgiveness of a Debt)
(Debtor) Your Name, address, and Phone number
Date: This is the date you are sending the letter
(Creditor) Name of the person the letter is addressed to, company name, address, phone number: Always attempt to obtain the name of the person you are dealing with in terms of the debt you owe. If you do not have a name, always attempt to find out who the letter should be addressed to, to make it more personal.
Salutation: be professional, e.g. Dear XXXX, Mr., Mrs., Ms.
Body – Paragraph 1 – Introduction: introduce yourself, include details about the amount of debt and the debt contract or invoice if there is one.
Body – Paragraph 2 – Describe details of the debt: Include the original amount of the debt, the amount you have already paid, and the amount remaining outstanding.
Include details regarding your inability to repay your remaining debt under the current schedule and the reason why. Keep it positive and recognize that you owe this debt but cannot meet the repayment terms and describe your situation.
Body – Paragraph 3 – describe details of the debt proposal: Describe your request and the options you would be able to agree to. This can end up being a negotiation where you work out new terms for repayment. Several options include:
– Complete forgiveness
– New repayment plan
– Forgiveness of a portion of the debt, with a repayment plan for the remainder
– Forgiveness plan and whether the future business is to be considered
Closing: friendly yet professional closing e.g. I look forward to hearing from your company concerning this proposal.
Signature: Always sign the letter and keep a copy for your records.
Format – Debt Forgiveness Letter (Creditor offering Forgiveness of a Debt)
(Creditor) Your Company Name, your name, address, and Phone number
Date: This is the date you are sending the letter
(Debtor) Name of the person the letter is addressed to, address, phone number: Always send the letter to the person owing debt, or contact within a company if the debtor is a company.
Salutation: be professional, e.g. Dear XXXX, Mr., Mrs., Ms.
Body – Paragraph 1 – Introduction: introduce yourself, include details about the amount of debt and the debt contract or invoice if there is one.
Body – Paragraph 2 – Describe details of the debt: Identify the original amount of the debt, the amount that has already been paid, and the amount remaining outstanding. Include brief details of why your company is forgiving the debt
Body – Paragraph 3 – describe details of debt forgiveness: Describe your plan to forgive the debt and if additional sales are welcome.
Closing: friendly yet professional closing e.g. We look forward to conducting further business with you.
Signature: Always sign the letter and keep a copy for your records.
Sample Debt Forgiveness Letter (Debtor Requesting Forgiveness)
Your Name,
Your address
Your Phone number
Date
Name of Creditor
Company Name
Company address
Company phone number
Dear Mr., Mrs., Ms. Last Name
This letter is being sent to request forgiveness of a total of $XX.XX in debt owed to (Company Name). We will be unable to repay our debt under the current schedule due to changes in our total income and employment situation.
I am providing documents describing my current employment situation, the income amounts, and other debts we currently have, including amounts we pay monthly for food, clothing, rent, and utilities.
I am respectfully requesting that you forgive by debt, as our current level of income precludes repayment. I recognize that this debt is my responsibility and would be open to discussing other solutions, such as forgiving a portion of the debt or extending the monthly payments.
I look forward to hearing from your company concerning the forgiveness of this debt.
Signature
Print your name under the signature.
Debt Forgiveness Letter (Word Template)
A debt forgiveness letter can be triggered by the debtor or the creditor. There are circumstances for both parties that make it advantageous for either party. Although, there can be consequences that must be considered before taking this action.
A debtor may request forgiveness if they have a change in their financial situation and are no longer able to repay their debt. The forgiveness negotiated with the creditor can range from full forgiveness to partial forgiveness with a new repayment plan. Each situation is different and must be managed separately.
Creditors may decide to offer forgiveness or accept requests for forgiveness for several reasons. It may not make financial sense to continue trying to collect the money owed, they can use the unpaid debt as a write-off, or if this disputed debt is blocking future guaranteed sales.
Debt forgiveness can also impact credit ratings and future business opportunities. Always keep it professional and avoid allowing emotional considerations to influence the tone of the letter or the negotiations.
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