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 relief, either fully or partially. Debt relief can take a number of forms: reducing the outstanding principal amount (again, either partly or fully), lowering the interest rate on loans due, and/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 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. For example, if a massive debt load makes it difficult to service borrowings, 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 or other debt to a lower interest rate is one easy to understand form 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 for a 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 or 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 consolidation options available from the federal government for people with student loans.
- Debt relief refers to measures to reduce or refinance debt or debts in order to make it easier for the borrower to repay their obligations.
- Debt relief may entail forgiving a portion of the debt's principle, lowering the interest rate, or consolidating several debts into a single lower-interest loan.
- Consumers, firms, and even nations may all be subject to debt relief in times of need in order to avoid bankruptcy.
Debt Relief and Consumer Debt
Consumer debt consists of debts that are owed as a result of purchasing goods that are consumable and/or do not appreciate. In 2017, consumer debt was noted to have reached a new high of $12.8 trillion since the 2008 financial crisis. This has been attributed to soaring student and auto loans, along with total credit card debt. Options for mitigating consumer debt include speaking with a creditor about debt relief options, such as restructuring loan(s) and/or loan forgiveness, or declaring personal bankruptcy.
Debt Relief in Developing Countries
Debt relief is not reserved for individual borrowers. Firms, and even nations can find themselves subject to debt relief. For instance, the Jubilee 2000 was a campaign in the 1990s by a host of NGOs, 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 35 countries, along with increased awareness of the nature and scale of existing debt and the significant corruption behind much lending and borrowing. Government accountability subsequently grew in this regard. Savings were used to reduce poverty, fund health, education, and rebuilding programs in these nations. 32 of the 40 nations served were in sub-Saharan Africa.
Possible Drawbacks of Debt Relief
Possible drawbacks of debt relief are that it could encourage imprudent and reckless behavior by historically fiscally irresponsible parties. These parties could potentially embark on borrowing sprees in the expectation that their creditors will eventually bail them out.
Other drawbacks include the lengthening of debt due to consolidation, whereby interest rate is lowered but the term is lengthened. In general, debt relief measures can also negatively impact one's credit score and so should be done sparingly whenever possible.