According to TMZ, the two have reached an agreement in a court-ordered mediation, after a two-year legal battle.
The couple, who were engaged in 2003 and later split in 2010, have two children together.
After their break-up, Michaels received $23,000 (£14,560) a month in partner and child support, but filed a complaint stating that she was not receiving enough money to take care of her children.
Sources now say the settlement stipulates that Michaels will receive a significantly larger monthly sum from Etheridge, though an exact amount is unknown.
Etheridge and Michaels will continue to share joint custody of twins Miller Steven and Johnnie Rose.
Since splitting from Michaels, Melissa Etheridge has been dating Nurse Jackie creator Linda Wallem.