What Is Debt Restructuring and Should I Consider It?

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Debt restructuring is a catchall term to describe various methods of paying down debt. You might attempt to alleviate your situation with debt restructuring in the form of negotiating with your lender, resorting to consolidation or refinancing, or perhaps even bankruptcy.

These strategies can be hugely helpful if you have a variety of debt tagged with high interest rates, and you feel like your monthly payments aren’t moving you forward. Read on to determine whether debt restructuring, in one form or another, could be right for you.

What is debt restructuring?

Many people hear “debt restructuring,” assume it’s a euphemism for bankruptcy and think it might not be the right option for their situation. While bankruptcy is a potential avenue toward restructuring your debt, it’s not the only one, and may not be the best option for your situation.

Before you look at various avenues toward debt restructuring, it’s important to consider:

  • How much you owe and at what interest rates
  • Which lenders you owe to
  • How you got into the debt in the first place

You may have one burdensome medical bill from a health emergency a few years ago. Maybe student loan structuring is appealing because education debt is weighing you down. Or maybe it’s credit card debt that crept up during a few years of living beyond your means.

Not only can knowing how your debt occurred give you insight into future money decisions, but it may be possible to use this information to help you decide on your best debt-restructuring strategy.

For example, if your debt was due to a one-time expense, like a medical emergency, it may make the most sense to negotiate with your lender, and see if it’s possible to come to an agreement on the remainder of debt owed.

What are debt-restructuring strategies?

Here are some debt-restructuring tactics to consider:

Negotiate with your lender

You’re barely paying down the interest on bills, and find your finances stretched thin enough to break. It may be a good time to speak with your lender regarding the terms of your loan. Why? Because a lender wants their money back, and would much rather negotiate for a guaranteed payment than have the debt go unpaid.

In terms of student loan restructuring, for example, you might be able to settle your debt for less than you owe.

This type of negotiation depends on the type of loan, and depends on your unique circumstances. If you’ve already defaulted on the loan, and it’s in collections, it may be possible to negotiate with the lender to see what terms are possible. It also may be possible to negotiate interest rates.

Do you pay your bills on time every month? Are you a good customer? Then, it may be possible for the lender to lower interest rates, allowing you to pay more on the principal owed each month. Interest negotiation depends on the type of loan. For example, federal student loans, whose interest is set by Congress, cannot be negotiated.

When to consider negotiating with your lender: It’s worth researching whether or not your lender would be willing to negotiate. Speaking to them and being upfront about your situation — whether you’re struggling with payments or have been on-time from the start — may make your lender more willing to negotiate. However, don’t be discouraged if this option doesn’t pan out; you have other tactics to consider.

Debt consolidation

Debt consolidation via a personal loan can help lower interest rates, simplify payments and allow you to pay a single bill instead of multiple bills each month, which can minimize the chances of a missed payment damaging your credit. You’ll still have to pay back your debt, but your lender is now the loan company, rather than your original lender.

It’s worth noting that with debt consolidation, you can choose a shorter or longer repayment term. A shorter term will increase your monthly payments, but get you out of debt sooner; a longer term will keep you in debt longer, but with lower monthly payments.

Loan offers are based on factors including the amount required, your credit history, and your credit score. But you may also have the option of getting a cosigner, like your parents, to potentially get more attractive offers.

When to consider debt consolidation: Debt consolidation may be an option if you’re overwhelmed with your bills — both the number of bills each month and the amount you have to pay. It’s important to understand how the debt occurred, too. For example, you may have taken out private student loans or relied too heavily on credit cards during your first years out of school.

Be aware that the best personal loan rates are reserved for borrowers with higher credit scores and, potentially, higher incomes. And loans can come with fees, such as an origination fee or prepayment penalty. You can explore bad-credit personal loans if your credit score is less than perfect. But keep an eye on loan rates if you’re trying to make repayment cheaper.

Debt refinancing

Often occurring hand in hand with debt consolidation, debt refinancing is a way to potentially lower your interest rates, decrease monthly payments or both on certain types of loans.

While a personal loan can cover a wide range of debts, refinancing can be a great tool for specific debt, like student loan payments. For example, if you have private and federal student loans, refinancing your student loans can allow you to pay a single bill instead of multiple bills. It’s a great way to pursue student loan restructuring.

When to consider debt refinancing: Refinancing debt, especially when it comes to refinancing student loan debt, comes with a few major considerations. One of the largest ones is that refinancing with a private lender pays off federal student loans and replaces them with a private loan.

Federal student loans come with borrower protections and repayment options, such as alternative repayment plans, that can’t be accessed with a private loan. Knowing what you’re gaining — a lower interest rate or lower payments — can help you decide if it’s worth what you may be giving up.

A loan from a family member

If you’re struggling with your bills, it may make sense to turn to your family for a loan, if they’re in a position to help you. Of course, when you agree to borrow money from a family member, it’s important to lay out terms, including interest rates and a repayment plan, and it may be helpful to have a neutral party, like a loan mediator, help hammer out loan specifics.

When to consider a personal loan from a family member: You know your family, and you know if someone is in the position to potentially loan you money — and still have a future of stress-free Thanksgivings.

If you feel someone is willing to give a loan, making sure you’re both happy with the specifics of the repayment plan, as well as discussing what-if possibilities (what if you lose your job, what if they can no longer pay you what you need) can make sure you’re both on the same page.

Balance transfer to an intro zero-APR credit card

If you have debt, are no longer charging purchases on credit cards — and are committed to paying off your debt — then looking at potential zero-APR promotional offers on credit cards may make sense.

Just remember: These promotions generally expire after a certain number of months, at which time an interest rate will be applied. If you’re confident you can pay off that transferred balance in a set amount of time and have excellent credit, it may make sense to consider transferring the balance on your current cards, which could save you money on interest and allow you to pay down the principal of the debt owed.

When to consider a balance transfer: A balance transfer card may be a good option if you have credit card debt alongside excellent credit, a plan to pay off your debt and aren’t actively charging expenses on a card at this point in your life. A balance transfer may make even more sense for credit card debt you consider manageable, but feel you could pay faster if you weren’t mired down by interest.

Bankruptcy

Often a last resort, there are times when you’re so overwhelmed with bills that bankruptcy may seem to make the most sense for your financial future.

It’s important to know what bankruptcy is, and how it may affect the debt you have. For example, it can be hard for student loan debts to be discharged in some bankruptcy filings.

Bankruptcy will harm your credit, remaining on your credit report for up to 10 years. Speaking with a credit counselor or student loan counselor (you may be able to find free credit counseling) can help you figure out if this is the right path for you.

When to consider bankruptcy: If you’ve exhausted other options and feel overwhelmed by debt, bankruptcy may be necessary.

Of course, speaking with a counselor or bankruptcy lawyer can help you understand what bankruptcy means, how it affects your financial future and how to move on. It’s also important to know whether your debt is eligible to be discharged via bankruptcy, as some debts, like federal student loans, may not be.

How do you choose a debt-restructuring strategy?

There’s no right option for all, and it may be that a combination of methods is the right choice for you, based on your unique financial needs.

Before you choose a strategy, understand how much debt you owe, and understand that you have options. Feeling in control of your financial choices is a good first step in feeling in control of your finances.

Hearing what others have done, researching various methods online and potentially speaking to a financial counselor or student loan counselor can help you confidently decide on the best method of debt restructuring for you.

Andrew Pentis contributed to this report.

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