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Payment Agreement Template

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A payment agreement outlines an installment plan to repay an outstanding balance that is made over a given time-frame. This is common when an amount is too much to pay for a debtor in a single installment. Therefore, the creditor agrees to make a deal that is affordable under the debtor’s financial situation. It is common for payment agreements to require the debtor to directly pay via credit card or ACH (bank account direct payment) on a recurring basis.

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Table of Contents

What is a Payment Plan?

A payment plan is a way for someone to pay for something over a length of time. This is often when an amount that is unaffordable to an individual is owed and the creditor allows payment over the course of months or years.

Interest Rate

Under most payment plans, there is no or little interest as long as payments are made on time. This is a common incentive for the debtor to not default on their payment schedule.

If there is a traditional interest rate, it cannot be more than the State Usury Rate.

How to Setup a Payment Plan

Setting up a payment plan requires the consent of a creditor and debtor and to define the terms and conditions in an agreement. For outstanding balances, a payment plan is often the “last chance” for the debtor to clear a debt.

Step 1 – Agree to Terms

The debtor and creditor must come to terms with a payment arrangement that benefits both parties. There are two (2) types of payment plans:

  1. Goods or Services – A payment plan created for a customer seeking to purchase goods or services with payments made over a short term (6-18 months). An interest rate is commonly charged.
    • Examples: Motor Vehicle, Cell Phone, etc.
  2. Outstanding Balance – Used to consolidate or make an agreement with a creditor where funds are owed. If there is interest accumulating on the balance, it’s advised the debtor pay 20% of their income. When agreeing to terms the creditor may request the debtor’s last two (2) years of IRS income returns and a copy of their last paycheck.
    • Examples: Past debt, Collections, etc.

Step 2 – Create a Payment Agreement

After agreeing to the balance owed, the terms of the payment plan should be written in a simple agreement. There is often no security pledged with the incentive to pay by the debtor is either interest-free payments or a discounted total balance.

The payment agreement should include:

  • Creditor’s Name and Address;
  • Debtor’s Name and Address;
  • Acknowledgment of the Balance Owed;
  • Amount Owed;
  • Interest Rate (if any);
  • Repayment Period;
  • Payment Instructions;
  • Late Payment (if any); and
  • the State of Governing Law.

After the signature of the creditor and debtor, the agreement becomes legally valid.

For payment plans consisting of more than $10,000, it’s recommended for both parties to attach a Notary Acknowledgment to the agreement and sign in the presence of a Notary Public.

Step 3 – Begin the Payment Schedule

Use a Credit Card/ACH Authorization Form to obtain the debtor’s payment details. Most creditors will require the debtor to set up automatic payments that will either charge the debtor’s credit card or bank account for each installment period.

Step 4 – Release the Debtor

After the balance owed has been paid-in-full, the debtor will be released from any financial liability. This can be completed through a Release Form and may also be used by the debtor to clear any outstanding balances on their credit report.

Payment Agreement Sample

Download: Adobe PDF, MS Word (.docx), OpenDocument


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