Debt is an obligation to pay money or resources owned by one party ( debtor /borrower) to another party (creditor/lender). It is becoming a normal lifestyle habit in today’s Indian society.
With easy access to personal loans, credit cards, business loans, and bank loans, and the emergence of various digital lending platforms, individuals are finding it easier to get debt, but with time, it becomes overwhelmingly difficult to repay these debts on time. In such scenarios, debt settlements often work as an alternative way to deal with legal battles.
In this comprehensive guide, we’ll explain what Debt Settlement in India is. And How Does It Work? And also, who is suitable for its legal framework, advantages, disadvantages, and other important parameters a debtor must consider before getting into debt or settling a debt.
What Is Debt Settlement in India?
Debt settlement is a mutual agreement between a debtor (the one who took the debt/loan) and a creditor (the one who gave the debt/loan).
In debt settlement, the debtor, in agreement with the creditor, pays a reduced amount/settling amount, that is usually less than the principal loan/debt amount.
To make it easier for you to understand, let’s say-
- You owe ₹20 lakh
- You negotiate and pay ₹17–18 lakh
- The lender waives the remaining balance
Debt settlement is typically used when:
- The borrower is financially vulnerable
- Regular EMIs cannot be paid
- The account has turned into an NPA (Non-Performing Asset) or is close to default
In India, debt settlement is not a formal legal process like insolvency, but a mutual commercial negotiation governed by contract law and RBI guidelines.
Types of Debts That Can Be Settled in India
Debt settlement is generally applicable to unsecured or distressed debts, including:
1. Personal Loans
Banks and NBFCs may agree to a settlement after prolonged default.
2. Credit Card Dues
Credit card debt is the most commonly settled debt in India.
3. Business Loans (SMEs & MSMEs)
Small business loans can be settled, especially if the business has shut down or is loss-making.
4. Corporate Debt (Under IBC)
For companies, debt settlement can also occur through the Insolvency and Bankruptcy Code (IBC) mechanisms.
5. Private Lender Loans
Negotiations are often quicker but riskier due to informal practices.
Note: the chances of settlement in secured loans (home, car) are less or have less to no chance of settlement.
How Does Debt Settlement Work in India?
Debt settlement is a properly planned step-by-step process:
Step 1: Financial Distress or Default
- EMIs are missed for 90+ days
- The loan account is classified as NPA
- Recovery calls and notices begin
At this stage, lenders become more open to negotiation.
Step 2: Assessment of Borrower’s Financial Position
- Current income and assets
- Probability of recovery through legal action
- Cost of litigation and time involved
In cases of low recovery options, settlements are a more preferred solution.
Step 3: Proposal for Settlements
The borrower (or their representative) submits a settlement offer, mentioning:
- Lump sum amount payable
- Source of funds
- Timeline for payment
Typically, lenders accept 40%–70% of the outstanding amount, depending on:
- Age of default
- Loan type
- Borrower’s profile
Step 4: Negotiation with Lender
- Counter-offers are made
- Payment terms are finalised
- One-time settlement (OTS) or phased payment plans are discussed
- Bank recovery department
- Collection agencies
- Legal representatives
Step 5: Written Settlement Agreement
- A written settlement letter is issued
- Terms include amount, deadline, and closure status
- It must clearly mention “full and final settlement.”
Make sure to always settle payments only after a written agreement.
Step 6: Final Payment and Closure
- Lump sum or agreed instalments
- The lender issues a No Dues Certificate
- Loan account is marked as “Settled” (not “Closed”)
Conclusion
Overwhelming debt in today’s time is a major issue, and debt settlement in India is an easily available and practical solution to solve this problem without taking a legal route. Thus, ensure that you opt for debt settlement in the presence of expert guidance to save yourself from any future financial risks.