The average American is swimming in debt. For businesses, debt is an acceptable way to expand operations.
Individuals are taking on debt just to get by. Loans and credit cards are needed to go to college, drive to work, and keep the lights on at home.
The average American has over $6,000 in credit card debt. On top of credit cards, they have over $16,000 in personal loans. This sometimes leads to financial issues as monthly interest charges pile up.
Many Americans turn to debt restructuring as an effective way to conquer this debt. How do you know that your restructuring plan has been correctly planned and executed? Read on to find out and gain confidence in your plan to tackle debt.
What Is a Debt Restructuring Plan?
Before we dive into more advanced topics, it is important to understand exactly what a restructuring plan is. Restructuring is designed for people who can no longer pay their bills. They are on the brink of default and creditors are running the risk of not getting paid.
The solution is to change the repayment parameters of the debt. The Annual Percentage Rate (APR), or interest, is the first thing addressed in a restructuring plan. By lowering the APR, monthly payments are reduced and become more manageable.
Another common tactic is to change the loan term. Consider a personal loan with 48 months left on the repayment schedule. A restructuring plan may extend the loan term to 60 months.
The intent is to spread the principal out over a longer period of time. This significantly reduces the monthly payment amount, which provides assistance to the borrower.
Lastly, you may want to address late fees during your discussions with creditors. It is common for creditors to waive all or part of your late fees to help you get back on track.
The true gauge of whether a restructuring plan was done right is whether or not the monthly payment declined. All of these measures should have been executed in your plan. The end result should be a substantial reduction in your monthly payment that alleviates stress on your personal budget.
Why Would a Creditor Agree to a Restructuring Plan?
You may be asking yourself why a creditor would reduce the APR or extend the loan term. Creditors are not known for being overly generous.
The reason is that your creditors can see the writing on the wall. They see the missed payments and interest piling up. They also know that a bankruptcy proceeding is looming unless something changes. Creditors will receive even less revenue after a bankruptcy filing.
Therefore, restructuring debt is a win-win for all parties involved. You reduce your monthly payments, while the creditors receive more revenue than they would have in a bankruptcy proceeding.
What Are the Different Types of Restructuring?
While borrowers want to reduce monthly costs, the goal of creditors is to retain as much revenue as possible. Out of this goal come two different types of restructuring.
The preferred approach for creditors is to execute a general restructuring. This type of plan allows them to avoid any financial loss.
While the changes do help borrowers, the debt is restructured in a way that delays revenue but does not eliminate it. This is generally achieved by extending the loan term and reducing the APR.
The other type is referred to as a troubled restructuring plan. In this scenario, the creditor does take a loss. They are unable to make up the accrued interest over an extended time period.
In other troubled restructuring plans, the creditor experiences a dip in the value of collateral or equity conversion. In an equity conversion, the creditor agrees to cancel the debt in exchange for an ownership stake in a business. Obviously, this situation is reserved for businesses and not individuals in debt.
What Are Some Other Examples of Restructuring?
In some cases, creditors get creative to avoid taking a loss. Consider a homeowner that is on the brink of bankruptcy.
The homeowner elects to sell their house in order to resolve their debt issues. The creditor may be willing to accept a percentage of the profit made on a home sale.
For example, a single-family home is sold for $100,000 in profit. The creditor may accept 50% of the sale in exchange for eliminating a portion of the debt. This is just one example of many potential restructuring offers that a creditor may make to recoup revenue.
Why Is It Different Than Loan Refinancing?
Many consumers confuse loan refinancing with a restructuring plan. Both refinancing and restructuring seek to reorganize the terms of the loan. This is why even professionals confuse the terms.
Restructuring plans are reserved for consumers that are troubled and unable to make timely payments. On the other hand, refinancing can be pursued by any consumer at any time. This is a way to improve the terms of existing debt.
Here, the consumer pays off an existing loan. They open a brand new line of credit in the process. This new loan has better terms with perhaps a lower interest rate or fewer fees.
Refinancing also has a positive impact on your credit score. The individual’s credit report now sees a debt being paid off, giving the consumer added creditworthiness.
This is a sizable change from restructuring in which consumers are late or missing payments frequently. These consumers have poor credit scores as a result.
Lastly, there are a few other benefits to refinancing. Some borrowers are extracting cash out of the new loan such as a home refinance. Others are consolidating multiple accounts into a single line of credit.
What Is the Next Step?
Are you in dire financial straits and need help now? A restructuring plan may be the solution for your budgetary woes.
You can extend the loan term and reduce monthly interest charges. With a lower monthly payment, you can regain control of your finances.
If you are interested in debt restructuring, contact us today to speak with a professional about the next step.