Debt Reduction Definition

Debt reduction, often referred to as debt relief, is the process of reducing your debt balance through a systematic approach to repaying your debt or the use of a financial maneuver to improve your debtor position. Refinancing and reorganization of debt are two strategies used by companies and individuals to reposition debt for more efficient payoff. Debt relief companies also assist those in over their heads with debt by negotiating with creditors.

Debt reduction offers many financial and psychological benefits. Lower debt makes it more feasible to keep up with monthly debt payments. This avoids additional late payment fees. Lowering your debt balance also lowers the amount that you pay in interest in the short term and long term. This can add up to significant savings. Additionally, the debt consolidation site BCAB points out that reduced debt also relieves a significant mental strain on those who carry debt.

The healthiest path to debt reduction is to pay down your debt quickly and efficiently. The sooner you pay off debt, the less risk you run of having your debt situation get out of control. This requires a disciplined and strategic approach that goes beyond meeting minimum monthly payment requirements. Paying off higher interest rate loans first and moving on to other debts is a systematic approach.

Debt refinancing is a maneuver used by individuals and businesses to improve their financial positions. Refinancing involves using funds for a new loan to pay off funds on an existing loan. Commonly used with home mortgages, this process is often used to get out of a higher rate loan and into a lower rate loan. Some refinancing options also provide cash-out components, which allow you to get equity out of your property or asset to use in paying down high-interest loans.

Debt reorganization is a formalized process used by individuals and businesses to avoid bankruptcy and dissolution. The website Law Firms discusses Chapter 13 individual debt reorganization, which establishes a plan for people making certain incomes to restructure debt over time. Businesses sometimes use Chapter 7 bankruptcy as a way to reorganize debt to avoid the more finalizing Chapter 11 bankruptcy. Though it has drawbacks, it offers an opportunity to manage some of the company's overwhelming debt load, which prevents business growth and stabilization.