Debt Restructuring

Filing for bankruptcy is not only embarrassing, but can create substantial obstacles in obtaining credit in the future.  As a result, some individuals avoid filing for bankruptcy and, instead, decide to implement debt restructuring techniques in which one negotiates with creditors to alter the terms of original debt agreements, including but not limited to amount, interest and the length of the repayment.  This process often involves a creditor “settling” for a lesser amount.  Clients often employ the services of a knowledgeable attorney to negotiate the terms of payment with creditors.  Below is some basic information concerning debt restructuring in the Commonwealth of Massachusetts.

The Advantages of Debt Restructuring
There are numerous reasons to debt restructuring including reducing stress, potentially lowering interest rates and, in some cases, a reduction of the debt that is ultimately owed.

Chapter 13 Debt Restructuring
When an individual files a bankruptcy petition under Chapter 13, all debt is divided into categories: debt that must be repaid in full and debt that is dischargeable for which an individual only has to pay what he or he can afford after application of the Bankruptcy Court complicated calculation process.  Filing a Chapter 13 bankruptcy allows individuals to discharge most of the unsecured debts and pay off the non-dischargeable debt over a period of time while protecting an individual’s assets from adverse events.

Debt Restructuring Versus Debt Consolidation
Debt consolidation refers to combining several different types of debt and paying these debts off with one loan. As a result, a borrower is left with just one monthly payment. Debt restructuring, however, involves a borrower negotiating with a lender or oftentimes lender to come to a new agreement which often occurs when a borrower is near bankruptcy.

The Fewer Creditors the Better
The less creditors that an individual has, the more likely that there will be a successful negotiation of debt restructuring.

Mediation is similar to filing bankruptcy but is not often used by individual borrowers. For businesses, however, mediation is often a chosen method for restructuring debt. Upon notifying creditors that a business will be unable to pay off debts, legal counsel can help establish new repayment terms that may reduce the balance and interest rate of a loan.

Personal Loans
Individuals frequently use low-interest loans to pay off high-interest debt. These type of loans are so common that there are companies that specialize in offering only this type of loan. Many loans come with long repayment schedules and interest rates.

Risks of Debt Restructuring
There are some risks of debt restructuring that individuals must be aware of, including a remaining risk of bankruptcy after debt restructuring. Unforeseen situations that might arise during or after a debt restructuring plan is established can create substantial obstacles.  Failing to follow the terms of a restructured plan for whatever reason could cause the entire debt that is due to become due in full immediately.  Also very important to know that, when a credit card company or a collection agency offers a settlement, there may be a significant income tax consequences if an amount of debt they offer to “forgive” is more than $600.  It is important to discuss all of these potential risks with an experienced bankruptcy and/or tax attorney before accepting any such offer for settlement or entering into any such debt restructuring agreement.

Resources for Debt Restructuring

Chapter 13 Bankruptcy Basics