Key Debt Definitions

Debt relief: the total or partial forgiveness of debt obligations through either a reduction in interest, the balance owed, payment terms, or all of the above; commonly refers to debt settlement, bankruptcy, and credit counseling, but can refer to anything that alleviates one’s debt burdens.

Debt settlement: approach to debt resolution that involves negotiating with creditors and resolving an outstanding balance for a lump sum payment of less than the principal. Also known as debt negotiation or debt reduction.

Debt consolidation: a loan used to pay off outstanding debts and in turn, the consumer pays back the loan at a presumably lower interest rate; the loan is typically but not always secured by property

Chapter 7 Bankruptcy: a proceeding in federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability; reported on one’s credit profile for 10 years. Commonly referred to as liquidation bankruptcy.

Chapter 13 Bankruptcy: a proceeding in federal court in which a debtor is ordered to follow a repayment schedule for 3 to 5 years in order to satisfy their debts; reported on credit profile for 7 years.

Credit counseling: approach to debt resolution that involves working with creditors to create a repayment schedule with reduced interest rates and late fees. Also known as debt counseling.

Debt management: the services provided by debt relief companies, whether credit counseling or debt settlement, or an individual strategy for debt reduction

Credit score: rating used by banks and financial institutions to determine the credit-worthiness of an applicant; a measurement of the probability that a candidate will default on any credit extended to them; Of the bankruptcy alternatives available to consumers, only debt settlement will affect one’s credit score negatively.