Is Debt Refinancing Or Debt Restructuring Right For You?

Concerned about paying your bills during this time of financial uncertainty?You’re not alone. There are a variety of ways to improve your overall financial situation. How much do you know about two of them — debt restructuring and debt refinancing? Here’s more information about both options, how they work, and factors to consider when deciding whether either is a route that may be right for you.

Debt refinancing and restructuring

While debt refinancing and restructuring are different processes, the terms are often used interchangeably by people who might not understand the distinction between the two. Each are processes that let you, or a company, improve your personal financial outlook. The accompanying infographic explains some of the distinctions.

Debt Refinancing

Debt refinancing means creating a new contract with a lender to pay a loan — with terms that may be more favorable than the original contract. It is used more frequently than debt restructuring.

To refinance a debt, you apply for a new loan (often with better terms, such as with a lower interest rate) and use the proceeds to repay an existing loan. The process is quicker than debt restructuring.It also impacts your credit positively because you’re able to pay the existing loan. In essence, you are replacing a loan with a different one. People often refinance debts when interest rates drop, and they can get better deals with the new rates.

Debt Restructuring

Debt restructuring means changing an existing contract to benefit the borrower, such as pushing back the due date for the principal payment. It is usually only used when the borrower is financially unstable and likely to be unable to pay his or her debts. It can have a negative impact on one’s credit score.

To restructure a debt, you must negotiate with your creditor to change the terms of your current contract so that both of you benefit. A creditor might only consider this option when you cannot make the payments on your debt and so may default on it. In this situation, it makes more sense for a lender to restructure the debt.If you default, the lender will have to pursue you for payment, which can be expensive and time-consuming.

Also, if you declare bankruptcy, that could prohibit the lender from recovering any or all of the amount owed. In these situations, lenders might agree to restructure a loan by altering its terms — such as extending the dates of payment, agreeing to waive late fees, or lowering the amount of payments.

Be sure to consider the advantages and drawbacks of each option before deciding to pursue debt refinancing or restructuring.

Infographic provided by Sekas Law Group