Short answer
A payment settlement agreement is a written contract between a creditor and a debtor recording the agreed amount, the payment schedule and what happens on default. It should identify both parties and the original dues, set the settlement amount and instalment dates, include a default clause reviving the full claim, and record how any notice, complaint or suit already started will be withdrawn or compounded.
The agreement format
PAYMENT SETTLEMENT AGREEMENT This Agreement is made at [PLACE] on [DATE] BETWEEN [CREDITOR LEGAL NAME], a [proprietorship / partnership firm / company] having its office at [ADDRESS], GSTIN [GSTIN], represented by [NAME, DESIGNATION] (the "Creditor") AND [DEBTOR LEGAL NAME], a [proprietorship / partnership firm / company] having its office at [ADDRESS], GSTIN [GSTIN], represented by [NAME, DESIGNATION] (the "Debtor") BACKGROUND A. The Creditor supplied [GOODS / SERVICES] to the Debtor under [PO / AGREEMENT / INVOICES LISTED IN SCHEDULE 1]. B. As on [DATE], a sum of Rs [ORIGINAL DUES] (the "Outstanding Amount") is due from the Debtor to the Creditor, which the Debtor admits. C. [The Creditor has issued a legal notice dated [DATE] / filed [CASE TYPE AND NO.] before [COURT / COUNCIL].] D. The parties wish to settle the Outstanding Amount on the terms below. TERMS 1. Settlement Amount. The Creditor agrees to accept Rs [SETTLEMENT AMOUNT] (the "Settlement Amount") in full settlement of the Outstanding Amount, subject to timely payment as set out below. 2. Payment schedule. The Debtor shall pay the Settlement Amount to the Creditor's account [ACCOUNT NO., IFSC, BANK] as follows: (a) Rs [AMOUNT] on or before [DATE]; (b) Rs [AMOUNT] on or before [DATE]; (c) Rs [AMOUNT] on or before [DATE]. 3. Cheques. [The Debtor has today handed over post-dated cheques nos. [NOS.] drawn on [BANK, BRANCH] for the instalments above. Each cheque is issued towards discharge of a legally enforceable debt.] 4. Default. Time is of the essence. If any instalment is not paid in full on its due date, or any cheque is dishonoured, then (a) the concession in clause 1 shall stand cancelled, (b) the entire Outstanding Amount, less amounts actually paid, shall become immediately payable with interest at [RATE]% per annum from [DATE], and (c) the Creditor may take or continue any legal proceedings without further notice. 5. Pending proceedings. [Upon receipt of the full Settlement Amount, the Creditor shall within [7] days withdraw / compound [CASE NO.] and the parties shall file a joint compromise application. Until then, the proceedings shall continue / be adjourned by consent.] 6. Acknowledgement. The Debtor acknowledges the Outstanding Amount for the purposes of Section 18 of the Limitation Act, 1963. 7. No further claims. On full and timely payment of the Settlement Amount, neither party shall have any further claim against the other in respect of the invoices in Schedule 1. 8. Jurisdiction. Courts at [CITY] shall have jurisdiction. [Or: Any dispute shall be referred to arbitration by a sole arbitrator at [CITY] under the Arbitration and Conciliation Act, 1996.] IN WITNESS WHEREOF the parties have signed this Agreement on the date first written above. For [CREDITOR LEGAL NAME] For [DEBTOR LEGAL NAME] [SIGNATURE] [SIGNATURE] Name: [NAME] Name: [NAME] Designation: [DESIGNATION] Designation: [DESIGNATION] Witnesses: 1. [NAME, ADDRESS, SIGNATURE] 2. [NAME, ADDRESS, SIGNATURE] SCHEDULE 1: List of invoices [INVOICE NO.] | [DATE] | Rs [AMOUNT]
How to fill it
- Fill Recital B with the full admitted dues from your reconciled ledger, even if you are accepting less. That is the figure that revives on default, and clause 6 makes it an acknowledgement of debt that restarts limitation.
- Keep the instalments few and close together. Short schedules fail less often.
- Get post-dated cheques for every instalment where possible, and note their numbers in clause 3. A dishonoured instalment cheque gives you a fresh Section 138 remedy.
- If a case is already pending, describe it exactly in Recital C and clause 5. Do not withdraw it until the last rupee is paid.
- Check your state's stamp duty on agreements and have the agreement stamped accordingly; an unstamped agreement can face objections when produced in court.
Common mistakes
- Withdrawing a Section 138 complaint or suit on signing, before payment. If the debtor then defaults, you start again, and limitation may have run.
- No default clause, or one that only says "the Creditor may take legal action". The clause must revive the original amount.
- Agreeing a discount without saying it is conditional on timely payment.
- Signing with someone who has no authority to bind the debtor company.
What happens next
Track each instalment against the schedule and send a short written reminder a few days before each date. Issue a receipt for each payment. When the last instalment clears, send a full and final settlement letter and withdraw or compound any case as agreed. If an instalment is missed, write to the debtor the same day invoking clause 4.
Settlement is how most recoveries end: about 60% of FundRaksha cases settle before court, usually on a documented plan negotiated by the advocate. See debt settlement negotiation.
Last reviewed: 2026-10-20. Information for Indian businesses; not legal advice.