A Beginner’s Guide to Restructuring Debt

With the amount of available credit out there, getting into debt is easier than ever. If you’re currently in debt and wondering what your options are, debt restructuring might be a solution that prevents you from having to file bankruptcy.

Of course, it’s best to first attempt a strategy that gets your balances paid off in full since this will have the smallest impact on your credit score. Compare the debt snowball vs. avalanche methods to see if one of these strategies would work for your situation. Both methods work to trigger debt freedom using your natural motivations.

If you’re in dire straits and can’t make a debt payoff method work, then keep reading. We’re going to give you a run-over of how debt restructuring works, plus a few tips for how you can get the restructuring process going.

What is debt restructuring?

When individuals, businesses, or even governing bodies cannot pay their debts, they’ll have two options: file for bankruptcy or restructure their debt. The debt can be money borrowed in the form of lines of credit, loans, or back taxes.

Debt restructuring isn’t something to be taken lightly. It can significantly impact credit scores with long-term consequences that prevent you from being approved for new credit cards, mortgages, or auto loans. Still, having your debt restructured is better than filing for bankruptcy or getting sent to collections.

How debt restructuring works

During the restructuring process, you’ll work with your creditors to create a new plan that removes your debt obligations for a reduced sum. The new deal can involve reduced interest rates, decreased total balances due, extended payment deadlines, or a mix of these.

You might wonder why a company or tax office would be willing to accept a different offer than the one originally agreed to. While it’s not their first choice, companies understand that requests for restructuring or settlement mean that there’s a finite amount of money to go around, so it’s best they get as much as they can now before you declare bankruptcy. If you decided to file a Chapter 7 bankruptcy, all of your debts would be discharged, leaving them with nothing.

Should I hire a debt relief company?

Debt settlement companies can be helpful if you’re having a lot of anxiety or stress thinking about how you’ll handle negotiating with your creditors, but the industry is chock full of scams. Bear in mind that your creditors are only legally required to work with you, so hiring an outside firm may not work the way you hope.

Still, being proactive is better than avoiding the situation entirely. If you feel like this isn’t something you can do on your own, take time to research debt settlement companies and find a reputable agency with good reviews. Interview a few different companies before deciding on one so that you know you’re getting the best deal possible.

How to restructure your debt

Whether your outstanding debt is for credit cards or taxes, the only way you’re going to get a better deal is by contacting who you owe money to and explaining the situation. It can feel embarrassing or may give you feelings of anxiety to have to admit you’re unable to stick to the original obligation you owe. Still, you’ll find it’s easier to come to a resolution when you keep your creditor up to date with your financial situation.

You’ll need to speak with a manager in the debt settlement department and have proof of your financial situation ready. If you’re able to offer a lump sum that’s around 50% of your total amount due, you may be able to get the rest written off from your bill.

There are no guarantees you’ll get a settlement or restructured offer, but keep in mind that these companies would prefer getting some amount over none at all. If you are in debt to multiple companies, you could use that as leverage to get a more competitive offer since your creditors know there will only be so much money to go around.

If you do get an offer, ensure it’s in writing and that you receive the written offer before getting off the phone. You should get an email sent to you with a basic summary of your negotiations, but if you can’t, don’t make another move without receiving a paper statement showing your new offer. These companies that offer credit are so large that one department will often not know what the other one has agreed to, so having a paper trail will make sure you’re able to get rid of your debt obligation without getting sent to a collection agency.

The bottom line

Debt restructuring is the last stop before filing for bankruptcy, so you must understand that it should be used as a second-to-last resort. If you can instead create a strategy using one of the debt payoff methods mentioned at the start, you’d be better off going that route. But if you’ve exhausted those options, use the tips above to ensure you get the best deal possible.