A COMPLETE GUIDE TO 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.
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.
