Debt relief is basically the forgiveness of certain accumulated debt. This is common among nations or corporations, but it can also happen at the individual level. Debt relief is often applied in cases of mortgage payments and credit card debt and can help the received avoid bankruptcy and the financial consequences of missing payments.
How It Works
Debt relief is meant to reduce the amount you need to pay back to your lenders. In some cases, all you need to do is to pick up the phone and call the company you owe money to. By explaining your financial hardship, you might receive some sort of help, which can be anything from a reduction on the debt or interest rate to a temporary hold on payments to an easy payment plan. If you can't pay your debt at all or have a large total to pay back, you might need the help of a professional, who will help you set up a system to help you get rid of debt as easily and quickly as possible.
Types
Debt relief refers to any service that allows you to settle your debt, for example, debt consolidation services or loans, filing for bankruptcy or negotiating a settlement on your bills. Debt consolidation usually requires the help of a mediator. The mediator talks to your lenders and arranges for payments, often obtaining a discount or at least a reduction in interest rates. You then make a single payment to the consolidator every month, and he distributes the money among your lenders. Mediators can also help you get a loan to cover your debts. Filing for bankruptcy will erase your debts but comes with financial consequences that you should consider seriously. A settlement on your bills is basically an agreement you make with the lender in which you will pay the whole debt at once in exchange for a considerable reduction on the total number.
Pros
The most obvious benefit of debt relief is that you'll be debt free sooner. Once debts are settled, you can reroute the money used toward savings, investments or other important pursuits. Also, because debts will be paid quickly (or forgiven), you won't accrue interest charges for long periods of time. If you have a lot of debts and are having a hard time keeping up with the bills, debt consolidation can simplify things and help you concentrate on payments, rather than on keeping track of what's due and when.
Cons
Debt relief affects your credit score. Bankruptcy leaves a mark for 7 years, and you might have a hard time obtaining credit or loans because of it. Debt settlement services are not free, and if you're already experiencing financial hardship, they may be difficult to cover. Also, when debts are settled, they show up in your credit report as such, rather than as paid. Settled debts may lower your score or at least alert future lenders that you aren't always able to pay off your debts. Also, when you settle a debt, you owe taxes on the amount you were forgiven, as the government considers that income.
Expert Insight
Experts disagree when it comes to debt relief. Some believe that it causes more problems than solutions and caution against it. Others see it as a way to get a new start. For example, Columbia University's law professor Ronald Mann advocates Chapter 7 bankruptcy for extreme cases. Consumer-affairs lawyer Joseph A. Mullaney, on the other hand, believes that debt settlement is a risky affair, as a large number of companies don't explain the consequences of settling. If you are working directly with your lenders and trying to come to an arrangement regarding discounts and settlements, then it's worth trying.
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