DEFINITION of 'Debt Relief'
The reorganization of debt in any shape or form, so as to provide the indebted party with a measure of relief, either fully or partially, from a huge debt burden. Debt relief can take a number of forms: reducing the outstanding principal amount (either partly or fully), lowering the interest rate on loans due, extending the term of the loan and so on.
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 sovereign nations.
BREAKING DOWN 'Debt Relief'
The obvious drawbacks of debt relief are that it may encourage imprudent and reckless behavior by fiscally irresponsible parties, who may embark on borrowing sprees in the expectation that their creditors will eventually bail them out. In addition, creditors have to incur needless losses on debt relief measures through no fault of their own.
In a number of situations, however, debt relief may be the only alternative. For example, if a sovereign nation with a massive debt load is finding it difficult to service its borrowings, its creditors may be amenable to restructuring the debt and providing relief, rather than risk the nation defaulting on its obligations and increasing global systemic risk.