Debt Restructuring vs. Debt🏅 Refinancing: An Overview

Refinancing and restructuring often invoke the same image of a desperate company on the verge of bankruptcy making a last-ditch effort to keep the business afloat. However, this is not always the case. Refinancing and restructuring are two se👍parate processes and not necessarily syno꧒nymous with financial distress.

Whether a company is actually refinancing or restructuring is often lost in translation. This has led to many people, including even seasoned finance professionals, using the words interchangeably𓃲 when, in reality, they are wholly different processes.

Refinancing and restructuring are debt 澳洲幸运5官方开奖结果体彩网:reorganization proc🅰esses taken to strengthen a person or a company’s financial outlook. The similarities end there. Debt refinancing involves rep♑lacing an existing debt with a new one with better terms, whereas debt restructuring is the altering of an existing contract to make debt payments more manageable.

Debt Restructuring

For more dire situations, borrowers can turn to 澳洲幸运5官方开奖结果体彩网:debt restructuring. At the most basic level, restructuring refers to altering an already existing contract, unlike refinancing, which starts with a new contract. An example of a typical restructuring would be lengthening the due date for the 澳洲幸运5官方开奖结果体彩网:principal payment on 𒁃a debt contract, or modifying the frequenc💖ies of interest payments.

Restructuring only occurs under special circumstances. It is a last-ditch strategy reserved for borrowers who are financially unstable and unable to meet 🀅debt obligations and can negatively affect credit scores.

In debt restructuring, the borrowing party must negotiate with the creditor to create a situation where both parties are better off. If you know you cannot make timely payments on your loan, or if a layoff has comproဣmised your financial stability, it is often prudent to begin t𒁃alks with your lender.

Lenders don’t want borrowers to default on their loans because of all the costs of bankruptcy. The majority of the time, lenders will agree to negotiate with 澳洲幸运5官方开奖结果体彩网:underwater borrowers to restructure the loan, whether that means waiving 澳洲幸运5官方开奖结果体彩网:late fees, extending payment dates, or changing the frequencies and amount of coupon payments.

Often restructuring will allow borrowers to maintain greater liquidity, which can then be useꦍd to restore or maintain cash flow sources to successfully repay the renegotiated loan contract.

The Cost of Bankruptcy

A key reason why borrowers and creditors are willing to consider restructuring debt is to avoid the cost of bankruptcy. Due to the legal expenses levied on both borrowers and creditors, most debt restructuring issues are settled before bankruptcy becomes inevitable. On average, attorney fees for 澳洲幸运5官方开奖结果体彩网:Chapter 7 bankruptcies range anywhere between $1,200 to $2,000.

Moreover, there are additional government paperwork filing charges, credit counseling charges, and debtor education fees, not to mention the severe effect on the borrower’s 澳洲幸运5官方开奖结果体彩网:credit score.

On the creditor’s side, if the loan was unsecured, then the creditor is out of the principal as well as the agreed-upon interest payments. If the loan was secured, then the creditor has to deal with 澳洲幸运5官方开奖结果体彩网:liquidating assets like real estate or automobiles. Usually, both parties want to avoid those outcomes, mak🎐ing rꦚestructuring an attractive alternative. 

Debt Refinancing

In debt refinancing, a borrower applies for a new loan or 澳洲幸运5官方开奖结果体彩网:debt instrument that has better terms than a previous contract and can be used to pay down the previous obligation. An example of refinancing would be applying for a new, che😼aper loan and using the proceeds from that loan to pay off the liabilities from an existing loan.

Refinancing is used more liberally than restructur🌺ing because it is a quicker process, easier to qua𒀰lify for, and impacts credit scores positively since the payment history will reflect the original loan being paid off.

There are various reasons for refinancing, with the most common being reducing 澳洲幸运5官方开奖结果体彩网:interest rates, consolidating debts, changing payment schedules and structures, and freeing up cash. Borrowers with high credit scores especialꦺly benefit from refinancing becausꦯe they can secure more favorable contract terms and lower interest rates.

Essentially, you are replacing one loan with another, so debt refinancing is often used when there is a change in interest rates that may influence newly created debt contracts. For instance, if interest rates are slashed by the Federal Reserve, new loans should carry lower borrowing costs, which is advantageous to borrowers.

It is important to note that when trying to pay down loans before their maturity, many fixed-term loans have what something known as call 澳洲幸运5官方开奖结果体彩网:provisions—terms that impose penalties in the case of early loan repayment. In such situations, borrowers should do their due diligence in calculating the 澳洲幸运5官方开奖结果体彩网:net present value of the cost of one loan versus another.

The Bottom Line

The terms debt restructuring and refinancing are often used interchangeably as if they mean the same thing. They don't. Both restructuring and refinancing are processes used to pay off debts. However, the way they work and their impact is different.

Refinancing is a fairly common practice that involves replacing an old debt with a new one with better terms. The borrower doesn't need to be in financial distress to do this and the consequences are generally positive.

Restructuring, on the other hand, is a last-ditch ไstrategy employed by borrowers unable to pay their 𝔉debt. It involves altering an existing debt contract and is only used under special circumstances. Lenders sometimes will let a borrower restructure their debt to avoid walking away with less or nothing.