Debt relief is a type of financial assistance that helps consumers pay off their debts. It may be in the form of debt settlement, credit counseling or bankruptcy. Debt relief options can have negative effects on a person’s credit score, and consumers should carefully weigh the risks and benefits of each option before choosing one.
Investopedia Explains Debt Relief
The term “debt relief” describes any reduction of a consumer’s legitimate financial obligations that they are legally required to pay. Debt relief typically applies to delinquent accounts and those in collections, and may involve a variety of financial products including credit cards, student loans, mortgages, medical bills and car payments. In order to qualify for debt relief, a consumer must be current on their repayment obligations and have the ability to afford their monthly payments.
Some debt relief options are marketed as credit repair, although this is not technically accurate. Those programs typically offer consumers a low monthly payment that is considerably lower than what they are currently paying. While these programs can help individuals manage their debt, they do not address the root cause of the problem: spending habits that lead to excessive borrowing and overspending.
Another form of debt relief is debt consolidation, which involves combining multiple unsecured debts into one payment, often with a lower interest rate than the original rates. However, these programs typically require that the consumer maintain consistent on-time monthly payments for several years in order to achieve the full benefit.
Lastly, debt settlement is a form of debt relief that involves negotiating with creditors to settle outstanding debts for less than what they are owed. This is a powerful option for consumers that cannot afford to repay their debts, but it should be considered carefully because it can have significant negative consequences on credit scores.
Debt relief can also be beneficial for countries. As a result, it has been widely advocated for by both development agencies and international lenders, especially the World Bank and the IMF. However, it is unclear whether debt relief can actually improve investment and growth in the world’s highly indebted poorest countries.
One reason is that these countries are more likely to face weak economic institutions and infrastructure than indebted middle-income LDCs. The other is that private creditors are reluctant to participate in debt relief programs, even those that involve rescheduling rather than forgiveness of the outstanding debt.
The best way to approach debt relief is with the assistance of a qualified professional, such as a certified credit counselor or a debt specialist. This individual can help you explore your debt relief options and determine which ones are the most appropriate for your situation. In addition, a debt specialist can help you find ways to reduce your spending and increase your income so that you can afford to make the necessary payments to meet your debt obligations. Regardless of which debt relief solution you choose, it is important to understand that it will impact your credit scores, and this can be challenging for many people to accept.