Debt Restructuring: What is it, and How Does it Work?

Posted on November 19, 2021 in Debt

With the help of our expert guide, learn what debt restructuring is, how to restructure your debts today, and whether it’s a good idea for your personal finance situation.

Debts among Americans have been on the rise in recent years. According to the Federal Reserve Bank of New York, consumer debt in the US grew to $12.84 trillion in the second quarter of 2017. This was the highest debt ever since the Great Recession in 2008.

The pandemic has made things even worse for consumers. In 2020, the unemployment rate rose from 3.5% pre-COVID to a high of 14.8% in mid-2020. As a result, the level of household debt increased to $15.24 trillion in the third quarter of 2021, meaning more people are in debt now more than ever.

If you find yourself deep in debt, you need to understand debt restructuring and how it can help you settle your debts. In this post, we’ll talk about debt restructuring and how it works. We’ll also discuss valid alternatives. Let’s delve right in.

What is the Definition of Debt Restructuring?

The generally accepted debt restructuring definition is converting your debt into another type of debt that you can easily manage, therefore, repay. Restructuring can either be done by a company, a country, or an individual. The process is usually in response to some financial difficulties, such as credit card debt, or other existings debts.

What is Debt Restructuring, and How Does it Work?

Debt restructuring makes your debt easy to manage and settle, which helps you to avoid defaulting. The process entails negotiating better repayment terms, such as lower interest rates or extended repayment periods, which benefits both the lender and the borrower.

The lender gets to avoid the risk of losing money through the defaulter. On the other hand, the borrower pays a lower amount (a fraction of the debt) and escapes bankruptcy.

If you are in a deep financial struggle with credit cards or otherwise, do not panic. Follow the steps below to guide you on how to restructure debts.

1. Contact the lender

Once you realize that you will not meet the debt repayment agreement, you should contact your lender and explain your financial struggles. Getting in touch with the lender shows you are responsible and willing to handle your financial challenges.

2. Wait for the response from the lender

Understand that your lenders are not obligated to help you. You may contact them, but they still choose to hold their repayment policies.

If this happens, and you go ahead and default, your lender might sue you or report to the credit bureau. However, this shouldn’t discourage you, as many lenders are willing to help you and offer debt settlement alternatives.

3. Weigh your options if the lender decides to help

If the lenders listen to your case, they are most likely to offer you debt settlement alternatives. If your lender proposes debt restructuring, you may have the option of an extended repayment period or lower interest rates. Weigh your options while considering the risks and benefits, and decide what works best for you.

4. Negotiations

Your lenders might be willing to negotiate with you. So to get a better deal, ensure you have great negotiation skills but do not expect too much. You can try to negotiate for a lower total payment or reduced interest rate.

Accept the New Terms

After the negotiation, your lenders will give you the new terms that you will need to accept and sign formally. If this happens, ensure you follow through and pay your debt to avoid any misunderstanding.

What are the different types of debt restructuring?

As mentioned earlier, debt restructuring can happen in an organization, country, or individual. The methods depend on who is involved in the process. Let’s now discuss the different types.

Debt Restructuring for Companies

Businesses incur debts for different reasons. Whichever the reason, it may be challenging to pay these debts. However, debt restructuring comes in to make the debt payment process easier.

There are several ways for companies to restructure business debts. They include;

a. Debt-for-equity swap

This happens when the lenders agree to deduct a percentage of the business debt. In some cases, the lender may completely write off the remaining debt in exchange for equity, meaning the lender gets a portion of the business. The equity option can be beneficial if the business assets are valuable and the outstanding debt is huge.

b. Haircut

A “haircut” is another restructuring option for business. It involves negotiating with the lenders to write off a portion of the balance or reduce the interest rate. The negotiation happens between the business and the bondholders.

c. Issue callable bonds

A company can also issue callable bonds. The callable bonds are offered as a protective measure in cases where the interest rates are too high, and the company might find it difficult to repay the debt.

Any bond with a callable feature means that it is redeemable. The feature allows the issuer to restructure debt by negotiating for lower interest rates for a current debt.

Debt Restructuring for Countries

Countries take debts every now and then. Most countries on the verge of defaulting debt opt to move the debt from private to public. This eases the interest rates charged for the debts.

Just like companies, countries may opt for restructuring through “haircuts.” This means that the bondholders will agree to reduce the interest rates by a 25% decrease in most cases. The bondholders might also extend the maturity dates on the bond, giving the government more time to pay its debts.

Debt Restructuring for Individuals

Personal debt restructuring is an option for individuals who have challenges in repaying their personal loans or debts. You can directly contact your lender and negotiate for new terms. However, it is not a guarantee that the lenders will agree to your requests.

Understanding your options for debt restructuring can help you make an informed decision and get a better deal. For example, lenders might reduce your mortgage by 25% but ask for 40% of the house sale proceeds in return.

If you’re not confident in your negotiating skills, debt restructuring companies or debt relief companies can help you with the negotiation process.

What is strategic debt restructuring?

Strategic debt restructuring is a scheme that gives creditors the right to convert an outstanding debt into a major equity stake. This mostly happens in businesses. If the lenders feel that the change in ownership would provide a better financial position for the business, they have the right to do so.

A trouble debt restructuring may occur in the process of strategic debt restructuring. This happens when the creditors grant a concession to a borrower they would normally not consider.

What helps in debt restructuring?

Debt restructuring depends on your financial position, negotiation skills, and your lenders. For the most part, lenders find it beneficial to accept money from borrowers with poor credit scores who are on the verge of filing for bankruptcy. That’s because the amount received is often better than the compensation received after the client files for bankruptcy.

Your negotiation skills will come in handy if you need a great debt restructuring deal. If you’re not good at negotiating, debt relief companies like TurboDebt or a debt counselor will help you with the process.

The success of a debt restructuring process will ultimately come down to the lender. Some creditors will listen to you and draft repayment terms, while others will automatically sue you for defaulting a payment. And that’s why you need to carefully read the terms and conditions of a loan before it is approved.

Alternatives to debt restructuring

Debt restructuring can be too costly, especially when the lenders want some equity to your home or company. Other alternatives are available to ensure you retain full ownership of your property or businesses and settle your debt. Below are some alternatives.

Debt Consolidation

Debt consolidation involves taking a new loan to repay the old debt. First, you’ll have to combine the multiple debts to determine the amount of loan you need to repay these old debts. You can get different repayment terms that are manageable to choose from. In most cases, debt consolidation results in a lower interest rate and monthly payment. Ultimately, this results in a reduced total payment.

Payment Deferment

Payment deferment allows you to skip repaying your debt without any penalties. The lenders may agree with this only if you are experiencing a minor setback or have never defaulted payments on other occasions.

Debt Management

There are non-profit credit counseling organizations that will help you negotiate your debt repayment terms. You have a better chance for a good deal if you approach a well-known organization.

Debt Settlement

You can opt for a debt settlement if you cannot pay your debt immediately. Similar to debt management process involves negotiating with your creditors for better terms. However, your creditors may reduce your debt with the condition that you pay a lump sum amount. You may also choose to hire a debt settlement attorney or company to help you through the process.


Bankruptcy should be your last resort. If you qualify for bankruptcy, you can wipe out all your unsecured loans. However, this will come at the expense of your credit score, as you’ll hurt your credit score in the long run.

Pros and Cons of Debt Restructuring

Before approaching your lenders, you should understand the pros and cons of debt restructuring. If the costs outweigh the benefits, look for other methods to settle your debts. Below are the debt restructuring pros and cons.


  • Low-interest rates on your debt
  • Your business will remain afloat
  • You can manage your finances and cash flow better after debt restructuring
  • You get to protect your business assets


  • Adverse effects on your credit score
  • With equity, debt restructuring is expensive
  • Prolonged repayment periods will cost you more

FAQs About Debt Restructuring

Is debt restructuring a good idea?

Yes. Debt restructuring is a good idea if you cannot manage to settle your debts. You may opt to file for bankruptcy, but this might hurt your credit score for a long time- between 7 and 10 years, depending on the bankruptcy.

What is strategic debt restructuring?

Strategic debt restructuring is a situation where your lenders, mostly banks, can convert your outstanding debt balance into equity.

What happens in debt restructuring?

You approach your lender seeking either a reduction on the debt’s interest or an extension of the loan repayment period. If the lenders accept, you are given the new terms of payment.

What are the different types of debt restructuring?

There are three types of debt restructuring: debt restructuring for companies, countries, and individuals.

What is the meaning of restructuring of loans?

Restructuring loans is modifying the terms and conditions of the loan to make it more affordable.

Conclusion on Debt Restructuring

Debt restructuring will allow you to settle your debts at a lower interest rate. Other lenders may also write off your debt in exchange for equity to your property. It is up to you to decide if the terms are favorable to proceed with this form of debt relief. If you find the terms costly, think of other debt repayment methods that are equally manageable.

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