Sometimes, when a corporation is facing a large amount of debt, restructuring the entire operation is in order, whether this is manifested by closing branches of the company, merging departments, or selling the rights to the company outright. On other occasions, meanwhile, and for businesses and personal debtors alike, it is restructuring debt itself that is on the agenda. As tends to be the case with the various alternatives to bankruptcy, debt restructuring is similar to other options.
Of course, debt restructuring would not be worthy of mention were it not of worth to the individual debtor. The benefits to parties unable to make payments on their loans in restructuring debt is clear, for as with debt negotiation/settlement, the changes are numerically based and thereby tangible.
Nonetheless, while negotiation is a solution that would see debts eliminated by virtue of the creditor’s agreement to accept a reduced rate of compensation on their original loan, with debt restructuring, the overall principal of the loan is usually not diminished. Instead, certain parameters within the loan are changed, namely the rate of interest to be paid (which is made lower, in addition to the original sum borrowed), as well as the time over which the loan is expected to be paid (which is longer), making for less money owed per month.
As settlements with creditors will work more immediately and will more drastically decrease a person’s debt, it may not be immediately understood why anyone would opt for restructuring debt over negotiating with creditors or filing for bankruptcy. After all, some applicants for this remedy may ultimately still not be able to handle the demands of creditors, despite the greater flexibility they are afforded.
That said, debt restructuring is certainly less expensive than bankruptcy proceedings. In addition, restructuring debt is less likely to do serious damage to one’s credit rating than settlements or bankruptcy would. Thus, people who make use of this method may lose in the short term, but win in the end depending on their circumstances.
Imaginably, there are variations on debt restructuring that take into account a mix of debt reduction strategies. Especially for companies with a lot of financial value and shares to be issued as assets, restructuring debt may be supplemented in part or to a large extent by what is known as a “debt-for-equity” swap, where lenders would come to be stakeholders in the business trying to stay afloat.