Debt relief and the credit system are still very tricky. Unlike in Nigeria, the average American citizen has at least over $90,000 in credit owed. With being in debt practically being a normal expectation of adulthood in the USA, the narrative is quite different in Nigeria. Debt is something we often dread. This could be tied to how dysfunctional our credit system is and how much of a burden the interest following the loan can be.
To maintain and grow a functional economy, investors often require loans that are made available by commercial banks and other financial institutions using their depositors’ funds. The same goes for a budding entrepreneur who’s in need of starting capital or looking to expand beyond their current capacity.
As simple as the credit transaction may appear, most of the time borrowers default in repaying the loans availed to them. This results in the creditors/banks adopting several practical approaches to recover the indebtedness of the debtors.
For SMEs, finance has always been a major challenge. And the interest rate cuts carried out are mostly ineffective. This leads to many small and medium businesses (SMEs) getting into frustrating debts with throat-cutting interests, which sometimes leads to bankruptcy and business closure. Before we dive into the 5 things you need to know about debt relief, let’s explain debt relief briefly.
What’s Debt Relief?
Debt relief is the reorganization of debt in any shape or form to provide the indebted party with a measure of respite, either fully or partially. It also refers to the measures to reduce or refinance debt in the long term to make it easier for the borrower to repay.
Options for debt relief may entail forgiving a portion of the debt’s principal, lowering the interest rate, or consolidating several debts into a single lower-interest loan. This practice is formally known as debt settlement. Depending on the situation, debt settlement offers might range from 10% to 50% of what you owe. The creditor then has to decide which offer, if any, to accept.
Creditors may only be willing to consider debt-relief measures when the repercussions of debt default by the indebted party or parties are perceived as being so severe that debt mitigation is a better alternative. Debt relief may be extended to any highly indebted party, from individuals and small businesses to large companies, municipalities, and even countries.
Example of a Debt Relief
Debt relief is not reserved for individual borrowers. SMEs and even nations can find themselves in need of it. Nigeria’s debt relief deal is historic. For instance, in 2004, CGD set out to provide analytical support to Nigeria’s efforts to persuade creditors to agree to an appropriate debt relief package. In October 2005, Nigeria and the Paris Club announced a final agreement for debt relief worth $18 billion and an overall reduction of Nigeria’s debt stock by $30 billion.
Five Things to Know About Debt Relief
There is one positive about a debt relief program. You may pay a lower, single monthly payment. And you may pay less than you initially owed on the account. However, there are things that you should know before you decide to enter a debt relief program:
You Can’t Get New Loans
Once you enter a debt settlement program, you will be prohibited from opening new lines of credit. If you do, you will risk the benefits your debt management program has negotiated for you.
While not opening new credit is generally the best move for you while you are trying to get out of debt, make sure you do not get a loan, during your repayment period.
Your Credit Score Will Drop
When you enter a debt management program while having loads of debt, your credit score may drop. That’s because as your debt management company renegotiates your credit obligations, they may change when payments are made to creditors.
This results in late payments being reported on your credit history. Additionally, many creditors will close your accounts while you are in debt management, and the good history you have with those accounts will be taken off your credit history.
Regardless of whether your credit score goes up or down in the short term, enrolling in a debt management program is a long-term decision. The fact is that repaying your debts is the best thing for your credit score. It is certainly better than continuing to be late or not paying at all.
However, it is often a better option than filing for bankruptcy, with time your credit score will return to normal.
Interest Rates Will Reduce
During a debt relief intervention, once your debt management company makes contact with your creditors, most creditors will immediately lower your interest rate by several points. As such, it typically drops to a rate between 12 percent and 16 percent.
This can be a huge help if you are paying 17 percent or more, and especially if you have been late on one or more accounts.
You can avoid bankruptcy but retain the option
Nobody wants to declare bankruptcy. Enrolling in a debt management program provides you with a viable alternative to become legally destitute.
However, being in a debt management program is actually a prerequisite to filing bankruptcy. So even if you find yourself still unable to pay all of your creditors, bankruptcy is then an option for you after you have tried debt management.
There is no Guarantee and it may make your financial situation worse
There is no guarantee that your debt will be reduced when you join a debt management program. Lenders are not obligated to accept settlement offers. Some lenders even refuse to work with debt settlement companies.
If the debt settlement company doesn’t settle all of your debts, you are stuck with paying the additional fees and other penalties on the debt. In the long-term, you could have more debt than you started with, creditors with even more reason to hound you, and even worse credit.
Conclusion
Every debtor’s situation is unique. With debt relief, there doesn’t exist a one-size-fits-all solution. It might work in your favor or not. Some lenders may lower your interest rates, give you a grace period or settle on a system that will help you upset your debt to them.