Restructuring generally refers to ‘Debt Restructuring’ in the finance world. Debt restructuring is a method used by businesses, individuals, and even governments to avoid defaulting on current loans by securing lower interest rates. When a debtor is in financial distress, debt restructuring is a less costly solution to bankruptcy, and it will help both the borrower and the lender.
It is usually initiated when a corporation or organization in financial difficulty or with liquidity issues wants to refinance its current debt commitments in order to achieve more flexibility in the short term and make its debt burden more manageable in the long run.
There are different ways of Debt Restructuring:
- Increasing the loan tenure
- Negotiation a lower interest rate
- Reducing the total outstanding debt
- Bringing a past-due account up to date and applying the outstanding part to the principal balance
- Debt for equity swap refers to a situation in which a company's creditors agree to forgive any or all of its debt in return for equity in the company
- A bond cut is when a company negotiates to write off a part of the interest or capital on a bond
Is It A Smart Idea To Restructure Your Debt?
If you're having trouble making your payments, debt restructuring might be a good option. It may be influenced by your overall financial position as well as the debt restructuring options offered by your lender. To decide what's best for you, weigh the deals against your other choices, such as debt consolidation or bankruptcy.
When the moratorium on loan repayment was declared, it was stated that borrowers who chose it would not have their credit scores impacted. However, no such announcement has been made in the case of loan restructuring. Your credit score can be impacted directly or indirectly if you want to restructure your loan. Loan restructuring may appear on your credit report as "restructured," which may not result in a direct drop in your credit score, but lenders may be more cautious when evaluating your repayment potential if you apply for another loan in the near future.