If you find yourself suffering from outstanding credit card debt and have tried other options but failed, then perhaps it is time to consider restructuring your debt in order to eliminate it. But before you do, let’s look at its various advantages and disadvantages and when to consider restructuring as a valid debt elimination option.
Debt Restructuring Defined
The restructuring of debt is one of the many debt elimination techniques used by individuals and corporations to stay liquid. For most individuals, debt restructuring typically involves taking out a new loan in order to pay off a variety of creditors, eliminating the need to liquidate current assets just to avoid declaring for bankruptcy.
Some companies make use of debt restructuring when they are on the brink of insolvency, changing the terms of debt agreements in order to reduce and renegotiate its debts to return to a state of solvency and still be able to continue operations.
How Restructuring Works
Under debt restructuring, the creditor and the debtor agree on amounts that should be paid by the debtor in lieu of the original amount. This is in some way similar to debt management plans as both have the same goal of making a debt more manageable for the debtor to allow the individual to not default on the entire amount owed. It is different in that it builds off an existing contract, which requires more negotiation. It may also lower an individual’s credit scores since the original amount is defaulted in order to pay for a lower amount.
Advantages of Debt Restructuring
- Acquiring protection from creditors through being granted an automatic stay from collection agencies and foreclosure.
- Being granted with payment relief through the decrease in monthly payments made.
- Gaining forgiveness from some of the debt.
Disadvantages of Debt Restructuring
- Having a negative impact on an individual’s credit scores and will remain for up to 7 years on a credit report.
- An increase in the long-term cost of the debt through the amount of interest paid over time especially for prolonged repayment periods.
- Having forgiven debt being deemed as taxable income during the year it is received.
When to Restructure Debt
While debt restricting can offer financial relief, it is also important to know when to undergo the process since it entails negative consequences, such as the lowering of credit scores, potential increase in taxes owed, as well as paying higher interest costs over time. Filing for bankruptcy is actually one way to restructure debt.
Just like filing for bankruptcy, individuals need to weigh all other options first before ultimately deciding to undergo the process.
One scenario wherein restructuring debt sounds logical is if the individual is approaching the age of retirement, does not have any retirement savings, and the payments made on the debt owed inhibits any progress made. Another scenario is when someone owes too much and cannot be discharged upon filing for bankruptcy. This way, debts can be paid off more easily by reducing the amount owed to a more manageable level.