DEFINITION of 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.
BREAKING DOWN Debt Relief
In a number of situations, debt relief may be the only course of action. 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.
Debt Relief in Developing Countries
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.
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.
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.