What is Debt Relief?
Here are the Basics and More

If you need to ask, what is debt relief, you are very likely under financial stress due to a large debt burden and need to investigate all your debt relief options. Different levels of debt and the way that debt is structured requires different remedies.

The possibility of debt relief can come in many forms. While some creditors may be amenable to renegotiating a debt or revising the payment schedule, others may be intransigent and be unwilling to make even the slightest change to your terms. When your debt level first becomes burdensome, informing your creditors of an impending problem may avert a personal financial crisis. Legal remedies are available if all else fails.

Purpose of Debt Relief

Debt relief in its broadest sense is the use of laws and strategies to assist a debtor in paying debts. Debt relief is not intended to pave the way for a consumer to amass debt and then avoid paying his creditors. For example, if a creditor agreed to extend the terms of a loan in an effort to lower the monthly payment amount, a consumer may be able to gain some financial traction and avoid defaulting.

Sometimes the most important consideration in dealing with debt is for the consumer to be freed from harassing letters and phone calls from collection agencies. Harsh collection methods often drive a debtor to seek relief through drastic measures which may be unnecessary and counter-productive for both parties. Another purpose of debt relief is to give the debtor a respite from collection activities while he tries to repay his obligations.

Voluntary Debt Relief Measures

The easy credit available just a few years ago caused credit card debt to soar. The exorbitant interest rates charged by some companies' meant that many consumers were making little progress in repaying principle. When the consumer finally realizes that he has a problem, the best first step is to communicate with his creditors, which in this case would be the credit card company.

Depending upon your income, credit history, and the amount of the debt, a creditor may offer some help. If extravagant spending occasioned the burgeoning debt, the situation would be quite from a consumer who lost a job and now can't pay his debts. In one situation income is lost, while in the other income still exists. A credit card company will treat these two consumers quite differently.

The definition of what is debt relief must include a debt consolidation loan option. This is where the debtor may apply for a separate loan large enough to pay off all their other debts. Ultimately the consumer would make one monthly payment on the consolidation loan. Refinancing a house and using the equity for this purpose is common method of doing a debt consolidation on your own. The downside is if you wait too long to do this on your own you may find the arrearages have harmed your credit score or changed your debt to income ratio so toward the unfavorable side that you won’t qualify for a loan.

At this point, consumer credit counseling or debt management may be next on the agenda. A counselor will act as a mediator between the debtor and his creditors and negotiate a payment plan with the creditors. In return, the creditors will refrain from taking legal action. In this situation the consumer will be required to sign a binding agreement in which he agrees to repay the creditors.

In some instances, a creditor may forgive part of the debt in order to collect the majority of it. This is called debt settlement and may be negotiated by the credit counselor, an attorney, or the debtor himself. Typically, credit cards, lawsuits and judgments, medical bills and repossessed vehicles may be the subject of a debt settlement. Debts that cannot be settled are government guaranteed loans, secured debt, auto and home loans. Sometimes delinquent debts are written off by the creditor and sold to collection companies at a very small fraction of the original obligation. These companies will gladly accept a settlement because they have very little cost involved in purchasing the debt.

Fair Debt Collection Practices Act

An important part of the answer to what is debt relief is the Fair Debt Collection Practices Act. This law places restraints on what methods a creditor may use to collect a debt and helps to protect the consumer from abusive collection methods. Anyone who is in the business of regularly collecting debts, including debt collection lawyers, is covered by this law.

Notable provisions of the act include: prohibiting collection agencies from discussing your debt with third parties such as employers, requiring collection phone calls to be made during normal daylight hours, and to preclude the use of abusive language or threats to collect the debt.

What is Debt Relief—Legal Options

At the end of any discussion on what is debt relief you will find the bankruptcy options talked about as the last bastion of a debtor racked by obligations he can't pay. Chapter 7 and Chapter 13 are the two types of bankruptcy commonly used to discharge consumer debt. Other types of bankruptcy are available to business entities.

Chapter 13 is also known as the wage earners plan and is a form of court supervised debt reorganization. If a debtor has a regular income he may be allowed to use this law to his advantage. The debtor pays a court appointed trustee who deals with the creditors and insures that each one is paid proportionally what they are owed.

At the completion of the repayment plan, usually three to five years, the court may discharge any remaining debts. The creditors don’t get all of what was owed to them but they do get some reimbursement. The debtor has a huge stain on his credit report for many years to come but is free to rebuild his financial life. The biggest benefit gained from filing Chapter 13 is that the debtor keeps his possessions.

Chapter 7 is known as straight liquidation. The debtor relinquishes most of his assets which are sold by the court. The proceeds are distributed to the creditors and the debts are discharged. This is the most drastic form of relief when parsing the different methods debt relief.

As you have seen, answering the question what is debt relief can take several forms. The goal of each is to help the debtor pay his debts, or as much as he can, without undue harassment from his creditors or collection agencies.