Debt Restructuring – What It Is, How It works

Do you want to know how debt restructuring works, and what it entails? Then you are on the right page.

Maybe you are drowning in a sea of debt, you are wondering how you can get out of the water.

Moreover, there is a solution to debt restructuring that occurs when a creditor changes the terms of your loan agreement so that you can better manage the payments.

Also, it can include a long loan term, a low-interest rate or even a reduction in the amount owed.

However, there are diverse forms of debt restructuring, so keep reading about how it works and how to help you tackle your debt.

READ MORE: Debt Restructuring: Definition, How It Works, Types & Examples

What Is Debt Restructuring?

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Debt restructuring is the process of reworking an existing debt agreement better fit your current financial situation. Maybe you are struggling to make ends meet, you may find yourself picking and choosing the bills to pay first.

If your car loan gets paid late you can cover groceries weekly your credit card payment falls by the wayside because rent is due. When you miss the payment it can hurt your credit and result in penalty fees that cost you even more money in the end.

However, the temporary hardship program can let you skip several payments or avoid certain fees. During this setback or if you are already months behind on bills, creditors can make unusual offers to restructure your loan agreement. This is often called troubled debt restructuring.

How Debt Restructuring Works

Some companies seek to restructure their debt when they are faced with the prospect of bankruptcy.

Moreover, the debt restructuring process involves getting lenders to agree to reduce the interest rates on loans, extend the dates when the company liabilities are due to be paid or both.

Furthermore, these steps will improve the company’s chances to pay back its obligations and stay in business. As the creditors understand that they would receive even less should the company will be forced into bankruptcy or liquidation.

Debt restructuring will be a win-win for both sides because the business avoids bankruptcy and the lenders will receive more than they would have through a bankruptcy proceeding. The process works the same for individuals and nations, although on various scales.

Types of Debt Restructuring

There are different types of debt restructuring. Some are for individuals and families while others are reserved for companies.

●     Loan Modification

loan modification is a change to the terms of your loan, such as the interest rate, monthly payment or length of the loan. Moreover, loan modifications are used to make your mortgage payments more manageable.

●     Informal Debt Repayment Agreements

You and your creditor can negotiate informally to come up with a new repayment plan. It option is usually only available if you are behind on your payment but not in default.

●     Formal Debt Repayment Agreements

Formal debt repayment agreements also called forbearance agreements are legally binding contracts between you and your creditors. These agreements can be used to restructure both secured and unsecured debt.

●     Debt Settlement

Debt settlement is when you negotiate with your creditors to pay less than what you owe. This is only an option when you’re unable to make your payments or are facing bankruptcy.

●     Debt-For-Equity Swap

It happens when the creditor or lender forgives part of the company’s debt in exchange for a stake in the company.

●     Bondholder Haircuts

In this type of restructuring, bondholders agree to take a loss on the value of their bonds. It can happen if the company is not doing well and is unable to make its interest payments. Each type of debt restructuring has its advantages and disadvantages that you’ll want to consider before making the decision.

Pros of Debt Restructuring

Here are some of the benefits to consider:

●     Can Provide Debt Relief

When you are simply unable to stay on top of your existing payment schedule restructuring one more account can help you get back on track.

When your creditor is willing to reduce interest rates, waive fees, reduce balances or remove penalties that may also end up paying less money overall.

●     May Help You Avoid Loan Default

When you are unable to make minimum payments, you risk defaulting on your debt. When this occurs you will likely have your account closed and additional penalties imposed as well as have the default recorded on your credit report.

Restructuring the debt before you reach the point of default will help you save your pocketbook and your credit score.

●     Doesn’t Require Strong Credit

Unlike a personal loan or line of credit, you won’t need good credit to restructure your debt. It makes a more accessible option, especially when you’ve already dinged your score with late payments or high credit utilization.

Cons of Debt Restructuring

●     Can Damage Your Credit

Restructuring can’t negatively affect your credit in various ways, especially since you are no longer paying your account as agreed. When your lender marks the debt as settled – meaning that it was paid in full but for less than you originally owed.

●     May Not Be An Option For You

If you can restructure your debt depends on your lender’s willingness to offer you an alternative payment option.

●     Can Require a Lot of Time and Effort

Debt restructuring can be a lengthy, stressful and time-consuming process. It involved the back and forth with creditors to find a plan that works for your current budget.


Debt restructuring is the process to negotiate the terms of your debt so your payments are manageable. It can include the repayment period, lower the interest rate or reduce the overall balance owed.

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