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A Guide to Restructuring, Refinancing, and Consolidating Your Debt

Whether you can or should restructure your debt or refinance your debt will depend on your unique financial situation, your specific needs, and what options are actually viable for you based on your circumstances (such as your lender(s), how much debt you have, and other factors). Not every debt will be able to be restructured, as that is solely at the lender’s discretion, and consolidating or refinancing your debt will not always be beneficial for you.

The goals of this article are to help you understand the difference between debt restructuring and debt refinancing/consolidation in order to provide you with an explanation as to how you can use these two debt management tools. We also want to use this article to provide you with a quick overview of some other debt management options that might be available to you, which we did in the article’s final section.

By knowing what options are available to you and by having an understanding of how debt restructuring and debt refinancing/consolidation work as debt management tools, and by understanding how you go about using these two tools effectively, you will hopefully be able to take a stronger role in ensuring your current and future financial stability.

Debt restructuring and debt refinancing/consolidation are two of the most widely-used debt management tools that are available to consumers in the United States.

The Differences Between Debt Restructuring and Debt Refinancing / Consolidating:

Debt restructuring and debt refinancing/consolidation are two of the most widely-used debt management tools that are available to consumers in the United States. Debt consolidation and debt restructuring both share many similarities at their core when it comes to lowering your monthly debt costs and your overall debt cost, but they are not the same form of debt management relief. We have highlighted the main differences between the two here:

  • Debt Restructuring: debt restructuring, on the other hand, is the process in which a debtor and their creditor agree on an amount that the borrower can pay back instead of the debtor being obligated to pay the debt back in its entirety. Often a debt restructuring payment will need to be made in one lump sum, or a small number of payments, instead of being allowed to be paid back over the length of time that the original debt agreement was for, which is part of the trade-off of debt restructuring. The creditor gets a portion of the debt paid off in a short amount of time instead of holding the debtor responsible for the original debt when they are unable to pay it off / continue paying towards it at the original rate, and the debtor is no longer obligated to pay off the remaining debt in its entirety.
  • Debt Refinancing / Consolidation: this debt management tool is where you turn multiple debts into a single debt. This makes dealing with debt simpler because the borrower now only has to make one payment to a single financial institution as opposed to multiple payments, which are often made to multiple financial institutes. In order for debt consolidating to have the largest impact on your financial stability, this single new debt that you take on should have better terms than your previous debts, such as offering a better interest rate or having a more preferable term length. Because the one large loan is (hopefully) taken out with a lower interest rate, it will have the effect of both lowering the monthly repayment cost and lowering the overall debt repayment cost. Furthermore, many people find that consolidating their debt makes it easier to keep track of their money flow, and they become less likely to forget to make a payment.

You do not have to consolidate or refinance your debt on your own. There are third-party companies and nonprofits that can negotiate the terms of debt consolidating on your behalf. Additionally, there are company’s that you can hire to negotiate to settle or restructure your debt, but generally, this is a bad look for you unless the amount of debt that you need to be negotiated is substantial, because this requires you to hire and pay a third-party to negotiate with your debtor. After all, you’re unable to pay your debtor.

Now that we have explained the differences between these two debt management tools, we will provide an explanation of how to actually use them in the next two sections.

How to Restructure Your Debt:

Debt restructuring often requires that you come to an agreement with the entity that you owe your debt(s) to, and they are not obligated to allow you to restructure your debt with them in any circumstance except for one. Just because they are not normally obligated, however, does not mean that you can not try and come to a restructure agreement with them.

There are five steps that you will need to take in order to restructure your debt, assuming your debtor ultimately decides to work with you:

  1. Contact the Debtor: the first step that you need to take when attempting to restructure your debt is to contact the debtor that you are currently indebted to. Depending on your debtor, you may need to contact them in a specific way, or they may allow you to contact them in a variety of ways, such as online, by mail, by phone, or in person. When you get in contact with your debtor, you need to explain to them the financial difficulties that you are currently facing, and how you are being affected. Try to be clear about what you can and can not do in terms of paying back your loan. Many debtors will have empathy for you if you show great need, and in addition to that, it is often more financially beneficial for them to allow you to restructure your debt than it is to send your debt to collections and just hope that they will see payment for the debt and its associated fees sometime in the future;
  2. Wait for Debtor’s Response: after explaining the situation to them and requesting that they allow you to restructure your debt, you will need to wait for their response to your request if you did not contact them in person. Their response may include any terms and conditions for restructuring your debt if they decide that is the best route for them to take;
  3. Weigh Your Options: if they did give you new term(s) for repaying your debt, you will need to decide if this new agreement will be something that will lift the financial burden off of you enough for you to stay current with your new payments, or if you should try and get them to agree to better terms, or even if you should take a different route altogether;
  4. Negotiate: if the debtor did provide you with new terms to agree upon and they are still not enough for you to achieve some semblance of financial stability but you still wish to try and restructure your debt with them, then you will need to try and negotiate the terms further, and the final step;
  5. Accept the New Agreed Upon Terms: if they ultimately decide to allow you to restructure your debt, and they respond to your negotiation with a new set of terms that are acceptable for you, or the original offer was acceptable for you, then you will need to accept the terms and sign a new agreement with them. After signing the new agreement, you will have to follow your new payment plan and follow the new agreement to the best of your abilities, or else the whole process of trying to restructure your debt was ultimately unhelpful for your situation.

As we mentioned near the beginning of this section, there is one situation where a debtor can’t refuse to restructure your debt with them. This, however, is and should always be an absolute last option for anyone. If you were to file for Chapter 13 Bankruptcy and occasionally under Chapter 11 Bankruptcy, which are processes that are covered in the “Additional Debt Management Options” section of this article (along with 7 Bankruptcy), then you will have a court order that will restructure your debt for you, and give you between three and five years to pay off the new court-ordered debt total.

How to Refinance Your Debt:

Refinancing your debt is a little more involved than restructuring your debt, as there are different approaches to refinancing your loans depending on what type(s) of loan(s) you have. However, refinancing your debt is a debt management tool that is more reliable than restructuring your debt, as you do not need to request that your debtor forgive a portion of your debt, or to make other changes to your original debt agreement. In this section we will cover some of the more common types of loans that one might want to refinance:

  • Refinancing Students Loans:

The process of refinancing your student loans varies slightly based on what kind of student loans you still owe. There are three main types of student loans, each with their own interest rates and lenders, which can make refinancing your student loans a little less straightforward than refinancing other loan types:

  • Private student loans: these are generally traditional personal loans that were simply used to pay the costs that are associated with attending a higher education institution, such as tuition, textbooks, housing, and the like. Private student loans are a good candidate for refinancing.
  • Unsubsidized Federal student loans: these types of Federally-provided student loans are loans where the interest accrues while you are attending school, during the loan’s grace period where you do not have to make any payments towards the loan, and during deferment, if the loan gets deferred. If you choose to not pay the accrued interest before you the time that you are required to start paying back towards the loan principal, then that accrued interest gets added to the loan’s total cost. Depending on how much is owed in unsubsidized Federal student loans, what kind of interest rate your unsubsidized Federal student loan has, and what kind of interest rates you can get from a different lender, it could be a smart decision to refinance these loans, and;
  • Subsidized Federal student loans: a subsidized Federal student loan does not accrue interest in the same way that other types of loans do because the United States government will temporarily cover the costs. These types of loans are also called direct subsidized loans, and in order to apply for one, you have to fill out the Free Application for Federal Student Aid (which is also known as FAFSA) form. Because the government temporarily covers the costs of these student loans, and so they do not accrue interest for a period of time, it is best to only refinance these loans if you are able and it makes financial sense to do so, as the refinanced loan will accrue interest.

If you have a mix of two or more of the different student loan types, you can always get a loan from a traditional financial lender (such as a bank or a credit union), and use those funds to pay off not only your private student loans but also your remaining Federally-provided student loans.

  • Refinancing Credit Card Debt: the process of refinancing your credit card debt is fairly straightforward, regardless of how many credit cards you have debt floating between. You either load a single credit card with an interest rate that is lower than the others with the debt that you have on your other credit cards (by calling each credit card company and paying off the remaining debt with your chosen credit card), or you take out a personal loan from a lender that is able to offer you a lower interest rate than the credit cards do and use that loan to pay off your credit card debt.
  • Refinancing Home Mortgage Loans: mortgage loans are one of the two different loan types that most often get refinanced (with the other being auto loans). The process to refinance your home mortgage loan is as straightforward as a process that refinancing a loan can possibly be. You simply find a lender that is willing to offer you a loan in the amount that you need in order to pay off your current mortgage loan and they are willing to offer that loan at a better interest rate than your current loan is at. Using this new loan, you simply pay off your home mortgage loan from the original lender. Because the interest rate on the new loan is better, and because you have likely already paid off at least a portion of the original loan’s principal (meaning the new loan amount will be smaller than the original loan’s amount), your monthly mortgage payments will decrease noticeably. In addition to getting better rates on a refinanced home loan, some people choose to refinance their home loan in order to change their term length from a 30-year mortgage to a 15-year mortgage. Interest rates are generally lower on 15-year mortgages as it is even if you don’t refinance through a lender that is offering a lower interest rate on the loan, and the interest will only accrue for half the amount of time compared to a 30-year mortgage.
  • Refinancing Auto Loans: when attempting to refinance your auto loan, most lenders have very specific guidelines regarding if you are eligible to refinance or not, such as restrictions on the age of the vehicle, caps to how many miles are allowed to be on the vehicle, and if there are any outstanding balance limits. If you’re unable to refinance your auto loan but are in some form of financial distress, then restructuring your auto loan debt might be a better option for you.
  • Refinancing Small Business Loans: if you have taken out a small business loan from a traditional lender (such as a private bank or credit union), then you can generally refinance your loan in the same manner that you would refinance most other simple loans. By finding a lender that is willing to loan you the amount of money that is needed to pay off the original loan at a lower interest rate than the original loan, you will be able to decrease not only your monthly out-of-pocket costs when it comes to repaying your loan, but you will also be decreasing the total amount of money that is required to fully pay back the loan. There are two Federally-granted small business loans where you might decide to refinance with the help of the Federal government instead, but that require certain stipulations be met:
    • Refinancing a United States Small Business Administration (SBA) Small Business 7a Loan: it is possible to refinance an eligible SBA 7a loan for small businesses through the Small Business Administration itself, with no need to use outside financial institutions. A proposed loan needs to provide the small business loan borrower with a “substantial” benefit that is demonstrated by the payment amount being at least 10% less than that of the existing loan’s payment amount. Additionally, a written justification for each loan must also be provided explaining why the current loan agreement no longer has reasonable terms. If you choose to seek a private lender to refinance your 7a Loan, that is also a viable option.
    • Refinancing a United States Small Business Administration (SBA) Small Business 504 Loan: an SBA 504 loan—which is a Federal loan that can be used for purchasing real estate and equipment for a small business—can be refinanced either by way of a private lender or through the SBA itself, if certain requirements in the guidelines are met, such as: that the loan debt was incurred for the benefit of the small business in concern not less than 2 years before the date of the 504 Debt Refinancing application is submitted, and the SBA 504 loan borrower has been current on all repayments of the loan for the 12 months preceding the submission of the 504 Debt Refinancing application.

Additional Debt Management Options:

In this final section, we would like to cover some different resources that we did not cover in this article that you can use in order to obtain help with paying your monthly debt payments if they are a better option for you and your financial situation. There’s a variety of different resources in addition to restructuring your debt or refinancing your debt that might be useful in helping you to manage your debt (with each option helping in a different way, or to a different degree), such as:

Credit Counseling: the United States Consumer Financial Protection Bureau (CFPB) recommends that consumers find a Credit Counseling organization that is legitimate. These organizations are oftentimes non-profit organizations, and their credit counselors are fully certified and trained in the areas of consumer credit, finances and debt management, and personal budgeting;

Debt Management Plans: these are programs that can often be enrolled into through a Credit Counseling organization. While participating in a Debt Management Plan, you make a single monthly payment to the Credit Counseling group, who will then in turn make a payment to each of your debtors. Under these Debt Management Plans, Credit Counselors do not typically negotiate any reduction in the actual amounts that you owe to your debtors, but instead, they can lower your overall monthly payment. They are able to achieve this reduction by negotiating extensions of the periods over which the line of credit can be repaid, and by asking your creditor(s) to lower the interest rates on the loan and/or to waive certain fees that are associated with the loan;

Personal Loan Deferment: a loan deferment is a temporary break from the obligation of having to pay the agreed-upon monthly payment for a loan, including a personal loan. No lender is obligated to provide a borrower with a loan deferment, but if you are currently suffering from financial hardship (such as having recently lost your job, the hours at your job were reduced, or you have been impacted by either a natural disaster or a health emergency) and you explain your situation, many lenders are willing to try and work with you, because—from a purely profits standpoint—it is financially cheaper to give a borrower a temporary break from their payments than it is to start collections proceeding on the loan;

Modified Payment Plans: your lender might be willing to modify your payment plan to something that better suits your finances and when the funds from your income are made available to you. The modification to your payment plan can change a variety of aspects, such as when your payment is due, how much your payment is, and sometimes even an extension to your loan’s term length. Again, no lender is required to offer borrowers a Modified Payment Plan, but it is oftentimes a more preferable option to starting collections proceedings against a borrower;

Home Equity Loan: a home equity loan is a loan that is given for a fixed amount of money, which is secured by your home. This means that your home is the collateral that you are putting against the loan that you are taking out, so if you don’t repay the loan as agreed upon, then the lender can foreclose on your home. After taking out a home equity loan, you repay the loan with equal monthly payments that are made over a fixed term, until the full loan amount is paid back. This is what is known as taking out a second mortgage on your home because it is basically exactly the same as the original mortgage you paid on your home. The amount that you can borrow from most lenders is typically only 85% of the equity that is in your home, with this amount also being affected by things such as your income, your credit history, and the market value of your home;

Home Equity Lines of Credit (HELOC): these lines of credit are what are known as “revolving” lines of credit, much like credit cards are. You can borrow as much money as you need, at any time, by writing a check or by using a credit card that is connected to your HELOC account. These lines of credit have a credit limit, which you are not permitted to exceed. Because HELOC is a line of credit, you make payments only on the amount of money that you actually borrowed. HELOCs may also give you certain tax advantages that might be unavailable with other kinds of loans;

Third-Party Debt Settlement: if refinancing or restructuring your personal loan isn’t a viable option, or you can’t find a new lender that is willing to work with you, there is always the option to seek debt settlement help. Debt settlement plans are offered typically by a for-profit company and are generally used by those that are in a significant amount of debt. By using a debt settlement plan, the debt settlement provider will negotiate with your creditor(s) in order to reach an agreement where your creditor(s) let you pay a “settlement,” or a lump sum of money, in order to settle your debt with them. This settlement amount is less than what you still owed on your loans.

However, after this settlement has been reached and your creditor(s) have been paid, you are required to set aside a specific agreed-upon amount of money each and every month in a designated bank account until you have enough savings put back to pay off whatever settlement that was reached between the original creditor(s) and the debt settlers. Debt settlement can be risky, however, as there is no guarantee that the debt settler can come to an agreement with your creditor(s), meaning you will still be stuck with the original loan conditions, but will also owe any late fees and additional fees that were accrued while the debt settler was trying to come to an agreement with the creditor(s), and;

Filing for Bankruptcy: a person that files for bankruptcy receives a court order that legally removes the responsibility to pay back certain types of debt. Bankruptcy is generally considered your last option because of its long-term negative impact on your credit. Bankruptcy information (both the date of your filing and the later date of discharge) stays on your credit report for 10 years and can make it difficult to get credit, buy a home, get life insurance, or get a job.

There are three main types of Bankruptcy under Title 11 of the United States Code (which is the Bankruptcy Code): Chapter 13, Chapter 11, and Chapter 7.

In Chapter 13 Bankruptcy, people with a steady source of income are allowed to keep some property (such as a mortgaged house or a car) that they might otherwise lose due to the bankruptcy process. Chapter 13 Bankruptcy, the court approves a repayment plan which will allow the person filing for Bankruptcy to pay off their debts in three to five years.

Chapter 7 Bankruptcy, however, is what is commonly referred to as “Straight Bankruptcy” because it involves the liquidation of all assets that are not legally exempt (such as vehicles, work-related tools, and basic household furnishings). Regardless of whether Chapter 13 or Chapter 7 are filed, Bankruptcy usually will not forgive child support responsibilities, alimony, fines, taxes, and most student loan obligations—unless the filer can prove undue hardship.

Chapter 11 Bankruptcy is most commonly filed by companies but can be filed by individuals. When Chapter 11 Bankruptcy is filed, it will result in one of three outcomes for the debtor that filed: reorganization, conversion to Chapter 7 Bankruptcy, or dismissal of the Bankruptcy filing. In order for a Chapter 11 debtor to reorganize their debt, the debtor must file with the court a plan of reorganization, which the court must also choose to accept. If a Chapter 11 Bankruptcy filing is converted to a Chapter 7 Bankruptcy by the Bankruptcy Court, then all of the debtor’s assets will be liquidated and given to the original creditor(s). If instead, the filing is accepted, then the debtor will remain in control of their assets, as a “Debtor in Possession” until the court-ordered debt amount is repaid. In some cases, a Debtor in Possession may be able to keep their assets by paying the creditor(s) the fair market value of those assets that the creditors have a lien against (such as a house or a car), as opposed to the contract price of the loan agreement(s) made on those assets.