Restructuring Debt?
Have you found yourself taking on more debt than you can handle? Are you at risk of going bankrupt? There are options you can take that can seriously help your precarious financial situation. One of these options is restructuring your debt.
What Is It?
Debt Restructuring is a financial process in which a debtor and creditor agree to “restructure” either the amount owed or the terms of the contract. By extending the loan period or lowering the interest rate, the creditor does not realize any losses. They are merely making it easier for the debtor to pay the money they owe. In some cases, normally when the debtor is in serious financial stress, a creditor may decide to receive less than the original amount owed. The debtor would default on those loans but have less debt to pay back in the process.
How Is It Different Than Debt Consolidation
To be clear, debt consolidation is a form of debt restructuring, as it achieves the same goal — altering the amount owed or terms of your credit so you can pay it back easier. Where it differs is in its application. Debt consolidation is the process of refinancing or turning multiple smaller loans into one bigger loan. The purpose of this is to make it more convenient for borrowers to pay off their loan in a shorter amount of time and achieve lower interest rates. Lower interest rates lead to lower monthly payments or more money you can spend paying off the principal amount. Debt consolidation, however, does not reduce the principal amount owed — something that debt restructuring can accomplish.
How Can It Help My Business?
Debt can be overwhelming and can prevent a business from thriving, expanding, and even threaten its existence. By restructuring your debt, you are giving your business a fighting chance to survive and improve its financial security.
Some benefits of debt restructuring include but are not limited to:
- Avoiding bankruptcy
- Reducing your debt/amount owed
- Lengthening your time to pay your debt
- Increasing your bottom line (less money going towards your debt)
- Avoiding unnecessary legal fees
- Preserving vendor relations
- Rebuilding your credit
How Does Restructuring Affect Your Credit?
It is important to note that debt restructuring can have an initial negative effect on your credit. While agreeing to pay less than you originally owe can help you pay back your debt faster, you are still technically defaulting on your loans, hurting your credit in the process. Businesses must evaluate their specific financial situation to decide on whether to restructure their debt or not.
If a business is still financially stable, making consistent revenue, and can limit taking on future debt, then restructuring may not be the right option. That business might benefit from budget assistance and debt payment plans.
However, if a business is in a poor position to pay back their debt or if the debt is preventing the company from running successfully, then taking the initial hit to their credit by restructuring their debt could be the best option, especially if bankruptcy was looming anyway. By restructuring its debt, a business will hopefully be able to consistently pay its debt obligations on time and in full — improving their credit score in the process.
Call Hoegen & Associates, P.C. 570-820-3332 to schedule a free initial consultation. We look forward to working with you!