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Debt Restructuring

Debt Restructuring

Are you juggling a lot of debt? Do you have multiple debt payments coming out of your bank account on different days with different interest rates? If you feel your debt is out of control, you could be looking for a solution to manage your debts. Chances are you’ve heard of debt restructuring but aren’t sure what it is or if it can help you.

Debt restructuring and debt refinancing are often used interchangeably but mean different things. Debt refinancing could be a good solution if you’re making your current payments with no problems. It can reduce the number of payments you have and sometimes your interest rates. Debt restructuring, on the other hand, results from negotiating a lower interest rate, longer payment term, or reduced amount of debt with your creditors.

Debt Refinancing vs. Debt Restructuring

Debt refinancing is sometimes called debt consolidation. It can lower your interest rates or payments or increase your time to repay your debts. Refinancing your debt might be a good option in some circumstances. If you have a good credit rating, can afford your payments, and are not in financial distress, debt refinancing could work for you.

Debt restructuring is renegotiating the amount you owe, the terms, or interest rates with your creditors. You are asking them to accept different terms from those you originally agreed to. As a result, debt restructuring can hurt your credit score.

Debt Refinancing

The three most common ways to refinance your debt are to get a consolidation loan, a line of credit, or to refinance your mortgage. Deciding which choice best depends on what you want to accomplish.

Consolidation loan

A consolidation loan is a loan used to pay off your outstanding debts. Ideally, the amount will be large enough to pay off all of them. These loans are usually unsecured, meaning the lender doesn’t require any collateral from you to approve the loan.

Typically, consolidation loans have an amortization of five years or less. So, if you follow the payment schedule, you’ll be debt free within the time frame of the loan. Another advantage of consolidation loans is that the interest rate can be lower than what you pay on your other debts. This is especially true if your other debts are credit cards.

Your monthly payment may equal or exceed your current payments due to the fact that it will be paid off in a much shorter time frame than some other debts, like a credit card. A potentially higher payment can be a downside but consolidation loans have the following advantages:

  • One monthly payment for all your debts.
  • You’ll pay the loan off in a reasonably short amount of time.
  • Payments can often be monthly, bi-weekly, or weekly to suit your pay schedule.
  • You might get a lower interest rate.

Line of Credit

A line of credit is another popular choice you can use to refinance or consolidate your debt. Lines of credit are revolving credit, similar to a credit card. It has a maximum limit you can repeatedly access as long as you keep your account in good standing by making payments on time.

Lines of credit can be unsecured, or the lender can secure them with investments or equity in your home. Interest rates on lines of credit are tied to the prime rate but are affected by your credit rating and whether you secured the line of credit. If you secure your line of credit with an asset, your rate will usually be lower than if the line of credit is unsecured.

Lines of credit have advantages that make them appealing:

  • Rates on lines of credit are often lower than on credit cards.
  • You have a minimum payment to make each month based on the outstanding balance.
  • You can pay as much over the minimum as you want.
  • You can make as many additional payments as you like.
  • You can re-access the credit if you need it.

If you opt for a line of credit to consolidate your debt, you may find:

  • It can be hard to qualify for a line of credit.
  • Your debt may stay stubbornly high if you only make your minimum payments.
  • Accessing the limit repeatedly might keep you in debt.

Refinance your mortgage

Refinancing your mortgage allows you access to the equity you have built up in your home. The two most common ways to do this are to combine all your debt into your mortgage so you have one payment.

If you’re a homeowner with equity in your property, refinancing your mortgage could be a great way to consolidate credit. A mortgage refinance has the following advantages:

  • You can set up one monthly payment as weekly, bi-weekly, or semi-monthly.
  • The interest rate is lower than the rates on credit cards, loans, or lines of credit.
  • Mortgages often have an extended repayment term which can lower your monthly payments.

However, refinancing your mortgage may not work for you if:

  • You have a poor credit rating.
  • You don’t have enough equity in your home.
  • You keep your credit cards open and keep using them.
  • You don’t want to use your home as collateral.

Debt Restructuring

Debt restructuring is an option if you’re struggling financially or in financial distress. It can help make your payments more manageable and sometimes reduce the amount you owe your creditors.

How debt restructuring works

If you haven’t been able to avoid defaulting on your loan or credit card, you might be carrying more debt than you can manage. As a result, your credit rating may have declined. In a situation like this, debt restructuring could be a possibility worth exploring.

Debt restructuring involves contacting your creditors and renegotiating the terms of your debts. It’s important to do this before they take legal action to collect the money you owe. In most cases, the goal is to have the lender reduce the amount you owe. If that’s unsuccessful, you might be able to have your interest rate reduced or your repayment term extended.

Another way you can restructure your debt is to contact a debt settlement company. These companies will contact your creditors on your behalf. They aim to get the lender to accept a reduced amount in exchange for a lump sum payment. While this approach works for some, unfortunately, there are several potential pitfalls:

  • Creditors might not accept the proposal from the debt settlement company.
  • Debt settlement companies charge fees that can make your financial situation worse.
  • You might not have the cash available to make a lump sum payment.
  • They can’t stop your creditors from taking legal action.
  • Some of these companies are scams.

Are There Other Options?

Debt refinancing can work if you qualify and are committed to making payments. However, it would be best to be disciplined enough to avoid overspending. Overspending after debt refinancing can leave you in a worse financial position than you were before. After all, debt refinancing is shifting your debt around, not reducing it.

Debt restructuring is possible if lenders accept your proposal. However, creditors might not accept any reduction in the amount you owe. They might not reduce your interest rates or extend your repayment term. A debt settlement company may not be able to help you if your creditors refuse to negotiate.

One of the best things you can do for yourself if you’re drowning in debt is to contact a licensed professional to help you. At Adamson and Associates, our Licensed Insolvency Trustees offer solutions to help you deal with your debt. In addition, we are experts in credit counselling, Consumer Proposals, and Bankruptcy.

We will work with you to find the best solution for your situation. Our LITs will explain how filing a Consumer Proposal or Bankruptcy will relieve your financial stress by stopping legal action, reducing the amount you owe, and giving you a fresh start. Call John Adamson and Associates at 519-310-5646 today for a free consultation to remove your debt burden.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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