Creditor
Debt Relief
Debt relief summary:
Debt relief is any strategy that helps relieve the burden and stress of debt.
Creditors aren’t required to negotiate with you, but many are willing to lower the amount you owe if it’s clear that you’re experiencing a financial hardship.
Bankruptcy is a legal process for dealing with debt, and creditors can’t opt out.
Debt Relief Definition and Meaning
Debt relief refers to any strategy you can use to reduce the burden and stress of debt.
Some people think debt relief is the same as debt settlement. Settling debt means getting your creditor to agree to accept less than the full amount you owe but consider it payment in full. This is only one debt relief option.
Debt relief could mean negotiating with a hospital to reduce medical bills, taking out a debt consolidation loan to make payments more manageable, or even filing for bankruptcy protection.
Types of Debt Relief
Here's a look at examples of some of the most common forms of debt relief.
Debt forgiveness
A well-known forgivable kind of debt is federal student loans. Anyone who is eligible and satisfies all of the program requirements can apply for debt forgiveness.
Debt negotiation
It's sometimes possible to negotiate with creditors to reduce your debt or to make your payments more manageable. Hospitals are known for lowering bills simply because you asked.
You could also negotiate for loan modification. For example, your mortgage lender might be willing to change the terms of your loan to make payments more affordable if you can show that you have a hardship that probably won’t go away any time soon.
Some other creditors, like credit card companies, may forgive some of your debt if it’s clear that you can’t afford to fully repay it. It costs money to take you to court for a debt, and there’s no guarantee your creditor will win and collect any money from you.
So in some cases, it makes more sense for the creditor to accept partial repayment instead of potentially ending up with nothing at all. You must negotiate with each creditor separately to work out a suitable settlement agreement. Creditors aren’t required to agree to reduce your debt, but many do.
Debt settlement
You can work with a professional debt settlement company if you aren't comfortable negotiating a settlement offer on your own or you feel overwhelmed. Expert negotiators work out agreements with your creditors on your behalf. They may already have relationships with your creditors and might be able to get better results than you could get for yourself.
A reputable debt settlement company won’t guarantee results or charge upfront fees.
One thing to be aware of is that forgiven debt could be treated as taxable income. You won’t owe federal taxes, though, if you’re insolvent when you settle the debt. Insolvent means that the total amount that you owe is more than the total value of the things you own.
Bankruptcy
Bankruptcy is a legal process for dealing with debt.
There are several types of bankruptcy. Most individuals file Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy lets you walk away from your eligible debts in a matter of months. You might have to sell some of your property to repay creditors. State and federal laws protect certain types of property, like your clothing, household goods, some home equity, and a modest car, so you don't lose everything.
Not everyone qualifies for Chapter 7. If the court decides that you can afford a monthly payment, you’ll be directed to Chapter 13 bankruptcy instead.
In Chapter 13, you don’t have to give up the things you own. You’ll have to give up all of your disposable income for five years (or three years if you’re low income). The court looks at your income and expenses and decides how much of a payment you have to make.
Creditors can’t opt out of your bankruptcy. They have to allow you to deal with your debts in the way the court orders.
Debt forgiven in bankruptcy is generally not taxable.
Debt Relief FAQs
Is debt relief the same as bankruptcy?
Debt relief is similar to bankruptcy because it allows you to satisfy unsecured debt for less than the amount owed. However, there are differences.
Bankruptcy is a matter of public record. Debt settlement is a private process. Chapter 7 bankruptcy typically takes a few months, while debt relief usually takes two to four years. Chapter 13 bankruptcy takes three to five years. Debt relief and bankruptcy are similar in some ways. They can both result in you paying less than the full amount you owe.
However, note that about half of Chapter 13 bankruptcies result in full repayment, plus bankruptcy and attorney fees. That means those people might have paid less if they had not filed for bankruptcy. So if you don't qualify for Chapter 7 or you don't want to lose assets, debt relief might help you more than Chapter 13.
Is there a government debt relief program?
The most common form of government debt relief is bankruptcy. But bankruptcy doesn’t always relieve debt.
If the court thinks you can afford a monthly payment, you may be put into Chapter 13 bankruptcy. You’ll make payments on your enrolled debts for three to five years and if any balances remain at the end of your program, they’ll be forgiven. About half of Chapter 13 enrollees do not end up having any debts forgiven.
If the court decides you don’t have enough disposable income for a payment, you’ll be enrolled in Chapter 7 bankruptcy, where all of your enrolled debts are forgiven within a few months. In Chapter 7, if you have assets, you might have to sell them.
For both kinds of bankruptcy, participation is mandatory. That means if a debt qualifies and you want to enroll it, the creditor can’t refuse to participate. Some kinds of debts don’t qualify, like federal student loans in most circumstances.
The other kind of government debt relief is for federal student loans. You can apply for a deferment or a forbearance. In a forbearance, interest will continue to accrue and if you don’t make any payments, you'll owe more at the end of the forbearance than you did before. In a deferment, some types of loans continue to accrue interest, but some don’t.
When should you consider debt relief?
Consumers should consider debt relief if they have recently gone through a hardship and are struggling to make minimum payments or can make payments but still can't seem to make a dent in the debt. In many cases, debt settlement is a good alternative to a loan or bankruptcy, or credit counseling.
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