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Tuesday, November 8, 2011

Does debt relief really allow the economy staying afloat

National Debt         Image by tpauly via FlickrAfter the recent financial cries, almost all individuals, corporate offices and governments are going through severe economic crisis and are incessantly falling into overwhelming debt. In order to come out of the exiting debt they can pursue debt relief program to get a fresh start in their life. Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

It helps people clear their debt by going through free debt consolidation, negotiating with creditors, debt management or bankruptcy. Although it is great way to wipe off the debt and all other financial obligations but it has its trade-offs. In some cases it can worsen your economic situation.

People opt for debt relief when they can no more manage their finances and when their debt amount far exceeds their ability to pay. People try to get relief from their debt by filing for the petition of bankruptcy or by working with creditors to settle the debt. Under bankruptcy and debt settlement, the maximum amount of debt gets discharged and people are freed to use their money towards purchasing other goods and services instead of allocating it towards debt. However, the trade-off is that banks and creditors discharge the debt and then hardly leave with cash to lend people. In order to regain the cash they increase interest for people who do pay on time to compensate for people who discharge their debt.

Businesses can also get relief from their debt through bankruptcy. Companies have two options to overcome their financial distress in the form of restructuring or exiting the industry. However, the economic value of restructuring depends on the size of industry. If it is a small business craft going through bankruptcy will have no impact on the economy. But if it's a large company going bankrupt will have significant bearing on the economy.

Although debt relief allows the businesses to stay afloat but it has some trade-offs on them. Vendors do not get paid, retirees do not get pensions, shareholders lose wealth. All these rippling effects can severely weaken the economy. Businesses going bankrupt may also result in the stock market causing an instantaneous loss of wealth.

Governments can also discharge their debt and achieve debt relief in form of defaulting on their loans. But sometimes defaulting on debt creates more economic problem rather than solving it. That is because countries hold each others debt, and one country defaulting increases the likelihood of other countries doing the same. However, when Germany failed to achieve debt relief from his neighboring countries after World War 1, he had to go to the extend of hyperinflation by printing money to pay for war reparations.

In conclusion, debt relief works best only when a small percentage seeks it. If many countries default on their loans, it will have a havoc impact on the economy. Similarly when too many houses go into foreclosure, it causes mortgage-backed securities worthless in the subsequent years. Support Michigan's Independent News Resource on ROJS NEWS by adding our RSS Feed Below!
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