Debt restructuring is the act of changing debt to make it more manageable, easier to pay off in the long term and less damaging to credit. The two broad categories of debt restructuring are an individual version and a business version. Business restructuring tends to be more complicated and focuses more on how debt is represented by the company and how it is related to equity. Several types of restructuring strategies are used.
Temporary Strategies
Temporary strategies aim to change debt in a way that will only last a certain time, often no more than a year. Deferment is a common option in this case. Lenders will agree to defer all payments on a particular debt for a certain amount of time. This removes short-term debt obligations in one area and allows the debtor to focus on debts in other areas, which can be removed and release income to deal with the deferred debt at a later time.
Consolidating Debt
Consolidating debt is a restructuring strategy that places most of the action on the shoulders of the debtor or business holding the debt. Consolidation pays off particular debts with a new loan, which then replaces the old debts. In this case, switching to a new loan with a lower interest rate can actually save money while giving the debtor a fresh start in the debt payment relationship.
Debt Settlement
Debt settlement is a more drastic action that seeks to end a debt entirely by agreeing to pay a portion of it upfront and having the lender forgive the rest. Debt settlement is usually a desperate strategy by the business because it does not look good in financial statements and will discourage investors. It also has negative effects on individuals, but may be one of the best ways to completely break free from an old debt.
Considerations
When an entity, especially a business, enters into a debt restructuring strategy, it becomes difficult to qualify for further debt financing. This can be a serious problem for businesses that need continual debt to finance a move toward expansion or additional product offerings. Needed debt may not be available if the business is already involved in changing previous debt because of an inability to pay it off.
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