It is an agreement to resolve an outstanding debt between a debtor and a creditor. When a debtor is under indebtedness to a creditor but does not have sufficient funds to pay, they can agree upon a lesser sum of money to be paid. This will help the debtor to clear outstanding dues, avoid legal action, and improve his or her credit health. The creditor will be able to minimize the losses, avoid expenses of hiring a lawyer, and get liquidity in a shorter period of time with lesser efforts as compared to a court order.