Debt Restructuring Definition

What Is Debt Restructuring ?

debt restructure is a march used by companies, individuals, and flush countries to avoid the hazard of defaulting on their existing debts, such as by negotiating lower interest rates. Debt restructure provides a less expensive alternate to bankruptcy when a debtor is in fiscal agitation, and it can work to the benefit of both borrower and lender .

Key Takeaways:

  • Debt restructuring is available to companies, individuals, and even countries.
  • The debt restructuring process can reduce the interest rates on loans or extend the due dates for paying them back.
  • A debt restructuring might include a debt-for-equity swap, in which creditors agree to cancel a portion or all of the outstanding debt in exchange for equity in the business.
  • A nation seeking to restructure its debt might move the debt from the private sector to public sector institutions.

How Debt Restructuring Works

Some companies seek to restructure their debt when they are facing the prospect of bankruptcy. The debt restructure summons typically involves getting lenders to agree to reduce the sake rates on loans, extend the dates when the party ’ second liabilities are due to be paid, or both. These steps improve the caller ’ mho chances of paying back its obligations and staying in occupation. Creditors understand that they would receive even less should the company be forced into bankruptcy or liquidation .

debt restructure can be a win-win for both sides because the business avoids bankruptcy and the lenders typically receive more than they would have through a bankruptcy continue .

The work works much the same for individuals and for nations, although on vastly different scales .


Individuals hoping to restructure their debts can hire a debt relief company to help in the negotiations. But they should make certain they ‘re dealing with a reputable one, not a victimize.

Types of Debt Restructuring

debt restructure for companies

Businesses have a number of tools at their disposal for restructuring their debts. One is a debt-for-equity swap. This occurs when creditors agree to cancel a fortune, or all, of a ship’s company ‘s outstanding debts in exchange for equity ( separate ownership ) in the occupation. The trade is normally a prefer option when both the outstanding debt and the company ‘s assets are significant and forcing the business to cease operations would be counterproductive. The creditors would quite take command of the disquieted company, if that ‘s necessary, as an ongoing refer .

A company seeking to restructure its debt might besides renegotiate with its bondholders to “ take a haircut “ —meaning that a share of the outstanding interest payments will be written off or a parcel of the balance will not be repaid .

A company will much issue callable bonds to protect itself from a position in which it ca n’t make its interest payments. A alliance with a callable feature of speech can be redeemed early by the issuer in times of decreasing concern rates. This allows the issuer to restructure debt in the future because the existing debt can be replaced with new debt at a lower interest rate .

debt restructure for countries

Countries can face default option on their sovereign debt, and this has been the font throughout history. In modern times, some countries opt to restructure their debt with bondholders. This can mean moving the debt from the individual sector to public sector institutions that might be better able to handle the impact of a area ‘s default .

Sovereign bondholders may besides have to take a haircut by agreeing to accept a reduce percentage of what they are owed, possibly 25 % of their bonds ‘ full measure. The maturity dates on bonds can besides be extended, giving the politics issuer more fourth dimension to secure the funds it needs to repay its bondholders .

unfortunately, this type of debt restructure does n’t have much international oversight, evening when restructuring efforts crossbreed borders .

debt restructure for individuals

Individuals facing insolvency can try to renegotiate terms with their creditors and the tax authorities. For exemplar, person who is unable to keep making payments on a $ 250,000 mortgage might reach an agreement with the lend institution to reduce the mortgage to 75 %, or $ 187,500 ( 75 % ten $ 250,000 = $ 187,500 ). In render, the lender might receive 40 % of the house sale proceeds when it is sold by the mortgagor .

Individuals can attempt to negotiate on their own or with the serve of a reputable debt relief company. This is an area that ‘s prevailing with scams, so they should make indisputable they know whom they ‘re involving. Investopedia publishes a regularly update list of the best debt relief companies .

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