Debt Relief

What is Debt Relief?

Debt relief is defined as the process of complete or partial forgiveness of the debt taken by individuals, corporates or nations which is mainly aimed to stop the debt growth or slowing of it from shooting to a bigger number and mainly involves restricting the debt to provide relaxation to the debt taker.

Short Explanation

Debt relief primarily occurs when there is certain relaxation provided on the debt taken by one by the creditor since the debt taker is in no position to repay the complete debt or the partial debt taken. This program has many disadvantages too over the advantage that it provides an option to the debt taker to pay a lesser amount than what was agreed to be paid. Generally, there are also debt settlement or relief companies available.

They are the ones who negotiate with the creditors to permit the debt seeker to pay a lesser amount in one go which is paid by the debt relief company and then the debt seeker pays the third-party company via monthly payments. This can sometimes be asking the lender to reduce the rate of interest or monthly payments or reduce the actual amount of debt owed or like extending the repayment tenure of the loan or debt.

Debt-Relief

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Debt Relief (wallstreetmojo.com)

Types of Debt Relief

#1 – Debt Consolidation

This involves collecting all the unsecured debts and collating them in a one-time monthly payment mode. Based on a good credit score both the interest rate of payment and the monthly payment can be reduced.

#2 – Debt Management

This is a case where the debt seeker works with a non-profit credit counseling agency which basically aims to lower the interest rate of payment and the payment to be made monthly based on the affordability of the debt seeker. The credit score here is not a factor that the counseling agency considers.

#3 – Debt Settlement

Here too a company will enter a negotiating term with the lenders to reduce the debt burden than what was owed. Lenders are not obligated here to pay the promised amount but entering this sort of agreement damages the credit score of the debt seeker for seven years.

#4 – Credit Counselling

Counselors from the non-profit organization will join this program to work upon a budget plan which works upon the utilization of money flow i.e. where it goes and where it comes from and curtailing the points where the money is spent excessively.

#5 – Bankruptcy

This can be the last resort when all the other mentioned four types of programs fail. If the timeline to repay the debt go beyond a longer timeframe like more than 5 years, bankruptcy can be a choice to start fresh and prevent oneself from making the same old mistakes.

How Does Debt Relief Work?

  • These programs are primarily aimed at providing relaxation to the debt taker during crisis time when the debt taker is finding it tough to repay back the debt taken. This can be in various forms depending upon the situation. Some may hire an external third-party company that acts as a counseling house and becomes an intermediary between the creditor and the debt taker and who further negotiates on the payment terms.
  • Sometimes the best solution is like the reduction of the rate of interest or the monthly amount to be paid. Sometimes it asks the creditors to drastically reduce the total amount of sum owed. Sometimes it may ask the creditor to increase the number of years which we also call the repayment term.

Examples

Options

As discussed above there is a total of five options of debt relief which includes consumer debt counseling, debt settlement, debt management, debt consolidationDebt ConsolidationDebt consolidation is a process which streamline several loans into a single one to receive the benefit of a lower interest rate. The reduced periodic payment leads to a reduction in liability.read more and finally when none of the four works the individual or the company needs to file for bankruptcy and start fresh from scratch without repeating same old mistakes. The affected person or company either can pay the debt on his own by agreement with some debt restructuringDebt RestructuringDebt restructuring is a refinancing process whereby the company facing cash flow issues arranges with lenders to renegotiate favourable or flexible terms, saving themselves from bankruptcy. The lenders may choose to lower the business rate or increase the time limit for paying the interest and principal amount.read more with the lender or involve a debt counseling company that negotiates with the lenders to reduce the debt or the rate of interest and instead charges certain fees.

Advantages

  • Repayment of debt is made with a low rate of interest or sum paid repaid back is lower than what the actual amount was owed to the creditor
  • The debt can be repaid quickly in a short span of time usually in 2-4 years under a good debt settlement program.
  • It prevents an individual or a company to fall in a debt trap wherein the pressure of paying a debt, more debts are taken to pay the previous debt owed and thus soon or later the debt figures become a huge amount.
  • As mentioned above there are 4 types of debt relief before we finally move into the last type which is bankruptcy. Thus, the program is typically aimed to protect an individual or business from getting bankrupt.

Disadvantages

Conclusion

Debt relief has more disadvantages than just advantages when brought into practice. It is very important for a company to have a properly balanced debt which is capable to repay it for on a timely basis. These programs are good when there is absolutely no option left for the company to pay its debt and this prevents the company from going totally bankrupt.

Recommended Articles

This has been a guide to What is Debt Relief & its Definition. Here we discuss the types of debt relief and how does it work along with examples, advantages, and disadvantages. You can learn more about from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *