What Is Debt Restructuring?

How Do You Restructure Debt?

Debt restructuring may be worth considering if you're far behind on payments, you've exhausted all of your other options and bankruptcy is the next logical step.

There are a few different ways you can restructure debt, but all of them involve communicating with your creditors about your financial situation and exploring your options.

Loan Modification

A loan modification involves the creditor changing the terms of the loan, which can include your monthly payment amount, the interest rate or the repayment term. Each of these can help make your payments more affordable while you work toward getting back on your feet financially.

Loan Repayment Agreement

You may be able to negotiate a formal or informal repayment agreement with your creditor. An informal agreement doesn't change the original repayment terms but allows you to get a new repayment plan, at least for a predetermined period of time.

With a formal repayment agreement, you're getting a new repayment plan, but you're also signing a legally binding contract.

Debt Settlement

Debt settlement allows you to get rid of the debt by paying less than what you owe, typically with a lump-sum payment. This option may not be available to you unless bankruptcy is the only alternative.

Can Debt Restructuring Hurt Your Credit?

Your payment history is the most influential factor in your FICO^® Score^☉ , and because debt restructuring indicates that you can't repay the loan as you originally agreed to, it could impact your credit history negatively.

How much it will impact your credit, however, will depend on the type of debt restructuring you choose. If your lender agrees to temporarily adjust your monthly payment amount or interest rate, this may not affect your credit score. But if you agree to debt settlement, it could damage your credit significantly.

Also, keep in mind that if you're considering debt restructuring, your credit score has likely already sustained damage from missed payments.

While debt restructuring can negatively impact your credit score, it's generally still preferable to the impact a bankruptcy or foreclosure can have, and it can prevent more extreme financial obstacles in the future.

What Are Alternatives to Debt Restructuring?

Depending on your situation and credit history, you may have access to other options you can explore before trying to negotiate with a lender.

Debt Consolidation

Debt consolidation involves using a personal loan or balance transfer credit card to consolidate high-interest credit card balances.

In addition to simplifying your budget by combining your monthly payments into one, it can also help you save money with a lower interest rate. And if you pick a personal loan, you'll have a fixed repayment term instead of a low minimum monthly payment and no set repayment schedule.

That said, debt consolidation typically only makes sense if you have good credit. Otherwise, you may not get an interest rate that's low enough to make the process worth it.

Refinancing

If you have a mortgage loan, student loan or auto loan, refinancing may be able to help you get a lower interest rate or longer repayment period, each of which can reduce your monthly payment.

Like debt consolidation, though, you'll have a better chance of getting a low interest rate if you have good or excellent credit. Also, note that some lenders, particularly mortgage lenders, charge upfront fees that could eat into your potential savings.

Forbearance

Whether you've already missed a payment or two or you're worried about missing your first, consider contacting your lender about forbearance options. Forbearance allows you to pause your monthly payments for at least a month or two while you get back on track.

Forbearance doesn't require a credit check, but because it usually only provides short-term relief, it may not be the right move if you don't anticipate your financial situation changing anytime soon.

Debt Management Plan

Instead of trying to negotiate directly with your lender, you may be able to enlist the help of a credit counseling agency. These agencies typically work with unsecured debt, such as credit card balances, and can negotiate lower interest rates and monthly payments, reduced fees and more with your creditors.

There's no credit score requirement to qualify, but there are usually modest upfront and monthly fees, and you'll likely need to close your credit card accounts for the three-to-five-year debt management plan.

Bankruptcy

Filing for bankruptcy is never ideal, but if you have no other options, including debt restructuring, it may be your last resort.

Bankruptcy can allow you to get on a reorganized repayment plan with your creditors or wipe out your debt altogether after liquidating some of your assets, giving you a fresh start. But a bankruptcy filing can remain on your credit reports for up to 10 years and make it difficult to get approved for credit for a while, so think carefully and consult with a credit counselor and bankruptcy attorney before you proceed.

Monitor Your Credit Throughout the Process

Regardless of how you plan to tackle your debt, it's important to keep an eye on your credit score throughout the process. With Experian's free credit monitoring service, you can get access to your FICO^® Score and Experian credit report, plus real-time alerts when changes are made to your credit report.

This service can make it easy for you to understand how your actions impact your credit and to spot potential issues as they come up, so you can address them quickly.