Different debt relief programs might help debtors consolidate loans, settle debts for less than what is owed, negotiate lower payments or interest rates, and eliminate debt through bankruptcy. Some creditors will work with people who are unable to pay their bills by negotiating a plan to ease the financial burden. They might forgive partial debts or reduce the amount owed.
Debt consolidation converts all monthly payments into a single bill each month to cover them. The debtor typically takes out a new loan to pay off all creditors and is left with a single monthly payment. These types of debt relief programs might include secured loans or unsecured loans.
A secured loan typically involves refinancing property, obtaining a second loan on property, or applying for a home equity loan. When property is used as collateral, interest rates and payment amounts might be lower. These loans usually allow a longer period of time to pay off. The debtor risks his or her property if the loan cannot be paid.
An unsecured loan typically charges a higher interest rate and provides a shorter time to pay. Monthly payments might also be higher than with debt relief programs using a secured loan. These are sometimes called personal loans, but in both cases the loan company usually analyzes income and other living expenses before approving these loans.
Debt relief programs asking for settlement involve negotiations between the creditor and debtor to reach a mutually satisfactory amount that will be paid. This could include total debt forgiveness or partial forgiveness of the total amount owed. Some debtors use this option when there is no hope of paying the total amount owed and creditors are calling to demand payment.
Bankruptcy might become the last resort when debt grows so out of control that it leaves few other options. These debt relief programs typically involve a formal process through the court, where some debts are forgiven. Bankruptcy might harm the debtor’s credit rating and ability to obtain credit for several years.
In the United States, a faltering economy prompted the Mortgage Forgiveness Debt Relief Act of 2007. The law protects homeowners from tax liability when they face foreclosure or sell a residence for less than they owe. Prior to the law, homeowners were taxed on the difference between what they owed on a mortgage and the amount the bank accepted when it was sold. Other government debt relief programs might help homeowners refinance homes at a lower interest rate.