What is Debt Restructuring?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 May 2020
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Debt restructuring is a process in which a debtor and lender choose to rework the terms and conditions that apply to a loan currently in force. Sometimes known as debt rescheduling, this strategy is often employed when the lender and debtor believe there are sound financial reasons for making changes to an existing loan contract. In general, both parties receive some sort of benefit from the debt restructure.

The process of debt restructuring can be used in both private and commercial settings. With business debt restructuring, the goal is usually to alter the terms of repayment to allow the debtor to make better use of available resources needed to operate the business at a profit. Debtors are sometimes open to the idea of a corporate debt restructure, especially if the action involves a long time client and the restructure will preserve the working relationship.

Business debt restructuring can be helpful for small businesses as well as large corporations. As with any lending situation, the use of small business debt restructuring is usually aimed at rearranging existing debt so the small business can make the most efficient use of available resources. When the lender is open to altering the terms of payment or other factors in the loan agreement, the action also protects the lender’s interests, in that the restructure minimizes the chances of the debtor defaulting at some future point.

For individuals, the use of debt restructuring can be a powerful tool when financial reverses of some sort take place. For example, if the main source of income is lost and the debtor is not able to secure a new source of income that is of the same level, it may become difficult or even impossible to continue paying the loan according to the original terms. In order to prevent default and all the expenses associated with that action, the lender might choose to alter the amount of the monthly payments, or possibly alter the payment schedule itself in an effort to help the debtor regain a sound financial footing.

At its core, any type of private or commercial debt restructuring has the goal of maintaining what is considered a desirable relationship between a lender and a debtor. This means protecting the financial interests of both parties, and allowing the repayment of the loan to continue in a manner that is beneficial to the lender as well as the debtor. While debt restructuring is not possible in all cases, many lenders consider this possibility a viable alternative to placing loans in default and possibly being unable to collect more than a portion of the amount owed.

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