Debt Relief

What Is Debt Relief?

Debt relief is the reorganization of debt in any shape or form so as to provide the indebted party with a measure of respite, either fully or partially. Debt relief can take a number of forms: reducing the outstanding principal amount (again, either partially or fully), lowering the interest rate on loans due, or extending the term of the loan, among others.

Creditors may only be willing to consider debt-relief measures when the repercussions of debt default by the indebted party or parties are perceived as being so severe that debt mitigation is a better alternative. Debt relief may be extended to any highly indebted party, from individuals and small businesses to large companies, municipalities, and even sovereign nations.

How Debt Relief Works

In a number of situations, debt relief may be the only course of action in order to avoid bankruptcy. If a massive debt load makes it difficult to service borrowings, for example, creditors may be amenable to restructuring the debt and providing relief rather than risk the borrower defaulting on its obligations and increasing overall credit risk. Refinancing a mortgage to a lower interest rate is one straightforward example of debt relief.

Another common form of debt relief involves debt consolidation, or the combining of several higher-interest loans into a single lower-interest loan. There are several ways consumers can lump debts into a single payment. One method is to consolidate all their credit card payments into one new credit card, which can be a good idea if the card charges little or no interest during an introductory period. They may also utilize an existing credit card’s balance transfer feature (especially if it offers a special promotion on the transaction).

Home equity loans and home equity lines of credit (HELOC) are another form of consolidation sought by some people. Usually, the interest for this type of loan is deductible for taxpayers who itemize their deductions. There also are several options available from the federal government for people who want to consolidate their student loans.

Consumer debt is debt that is owed as a result of purchasing goods that are consumable or do not appreciate. As of the fourth quarter of 2020, U.S. Consumer debt reached a new high of $14.56 trillion — a 1.4% increase from the previous quarter and $414 billion higher than the same period in 2019. The rise has been attributed in part to soaring mortgage loans. Options for mitigating consumer debt include speaking with a creditor about debt-relief measures, such as restructuring loans, loan forgiveness, or declaring personal bankruptcy, which are forms of debt settlement.

It is important to note that there are different rules related to declaring bankruptcy depending on the type of debt. If you are considering bankruptcy it is wise to speak with a qualified attorney who specializes in bankruptcy laws in your particular state. In addition, many law firms may offer a free initial consultation.

Example of Debt Relief

Debt relief is not reserved for individual borrowers. Firms and even nations can find themselves in need of it. The Jubilee 2000, for instance, was a campaign in the 1990s by a host of nonprofit organizations, Christian organizations, and others to relieve developing nations of their debt by the year 2000. The petition had more than 21 million signers. Outcomes included wiping out approximately $100 billion of debt from 40 countries, along with increased awareness of the nature and scale of existing debt and the significant corruption behind lending and borrowing practices.

Government accountability subsequently grew in this regard. Savings were used to reduce poverty and fund health, education, and rebuilding programs in these nations. Of the 40 nations served, 32 were in sub–Saharan Africa.

Taking advantage of debt relief can hurt your credit score, so don’t make a habit of it.

Disadvantages of Debt Relief

The possible drawbacks of debt relief are that it could encourage imprudent and reckless behavior by historically fiscally irresponsible parties. Some who are relieved of their debt may embark on borrowing sprees in the expectation that their creditors will eventually bail them out.

Other drawbacks include prolonging the payoff of debt due to consolidation, whereby the interest rate is lowered but the term is lengthened. In general, debt-relief measures can also negatively impact your credit score, so you should use them sparingly.