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What Is Debt Restructuring?

Animesh Prasad
June 21, 2021
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4 min read
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Last Updated: December 6, 2023

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In situations where you are all drowning in debt, you may have heard one particular phrase from quite a lot of people — Debt Restructuring. It is essentially an all-inclusive term for describing various methods of paying down debt and somehow saving yourself from getting completely drowned. Now if you are confused or you need to double down on the authentic information you need on this topic, then you have landed on the correct page. In this post on – What does restructuring debt mean? Is debt restructuring a good idea? – you will learn everything you need to know about the popular term.

Debt Restructuring Definition

Debt restructuring is a refinancing process wherein individuals or companies facing cash flow issues enter into an arrangement with lenders to renegotiate favorable or flexible terms, thereby gaining more flexibility in the short term and making their debt load more manageable overall. The lender may further choose to lower the rate of interest or increase the time limit for paying the interest and principal amount. Ultimately it saves the borrower from bankruptcy.

Debt Restructuring Reasons

The reasons to look forward to Debt Restructuring are typical financial difficulties that cannot be easily resolved. Under such circumstances, one has limited options – such as restructuring the debts or filing for bankruptcy. Keeping in mind the long-term consequences, restructuring existing debts is an obviously preferable and more cost-effective way to go.

The most common reasons may involve one burdensome medical bill from a health emergency a few years ago or the weight of student loans or maybe the credit card debt that crept up during a few years of living beyond your means. These situations eventually pave way for the only option – Debt Restructuring.

What Is Debt Restructuring: Debt Restructuring Working

The debt restructuring process involves getting the lender to agree to reduce the interest rates on loans, extend the due dates, or both. These steps improve your chances of paying back your obligations. Creditors understand that they would receive even less if you declare bankruptcy.

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Debt restructuring is a win-win situation for both sides because you are successful in avoiding bankruptcy and the lenders typically receive more than they would have through a bankruptcy proceeding.

You can also hire a debt relief company to help in the negotiations. Although do ensure that the company is a reputable and legitimate one.

The Popular Strategies

Here are some debt restructuring example you can consider.

Negotiate With Your Lender

If you are finding your finances stretched thin enough to break then it may be a good idea to speak with your lender regarding the terms of your loan. From the point of view of a lender, they would definitely negotiate for a guaranteed payment rather than have the debt go unpaid. Hence, you always have enough scope to restructure your debt in this way.

For example, in terms of student loan restructuring, you might be able to settle your debt for less than you owe.

In some cases, if you are a good customer with no derogatory marks on your credit report, you may also be eligible to get reduced interest rates while restructuring the debt.

You may also like to read: Pay As You Earn (PAYE) Repayment Guide

Debt Consolidation

This strategy on debt restructuring can help lower interest rates, simplify payments to a great extent and allow you to pay a single bill instead of multiple bills each month. It minimises the chances of a missed payment damaging your credit. You’ll still have to pay back your debt, but your lender would now be the loan company, rather than your original lender.

It’s worth noting that debt consolidation offers you the freedom to choose a shorter or longer repayment term. A shorter term will increase your recurring monthly payments, but at least you get out of debt sooner; a longer-term will keep you in debt longer, but with lower monthly payments.

Loan offers are based on a variety of factors including the amount required, your credit history, and your credit score. But you may also have the option of getting a cosigner, like your parents, to potentially get more attractive offers.

Debt Refinancing

Debt Refinancing, which often occurs hand in hand with debt consolidation, is a way to potentially lower your interest rates, decrease monthly payments or both on certain types of loans.

Recommended Read: How To Refinance Federal Student Loans

While a personal loan covers a wide range of debts, refinancing can be a great option for specific debt, like student loan payments. For example, if you have a combination of private and federal student loans, refinancing your student loans can allow you to pay a single bill instead of multiple bills. It’s a great way to pursue student loan restructuring.

You can also check- The Complete List of Student Loan Forgiveness Programmes, to see if you are eligible to eliminate your student loans altogether.

Other ways apart from these debt restructuring strategies include:

Taking a loan from a family member
Declaring bankruptcy

It’s important to know what bankruptcy is and how it may affect the debt you have. For example, it can be hard for student loan debts to be discharged in some bankruptcy filings. To know in-depth about this topic, consider reading: Student Loans and Bankruptcy.

With this we come to the end of this blog on – What Is Debt Restructuring.

PS: If there’s anything more you’d like us to know about. Add it to the comments section!

Thank you for reading this blog ‘What Is Debt Restructuring?’. If you enjoyed reading this blog and would like to continue reading more about debts and student loans then do check out our following blogs.