How Debt Restructuring Can Help You Avoid Bankruptcy

How Debt Restructuring Can Help You Avoid Bankruptcy

Filing for bankruptcy can have long-lasting negative effects on your credit score and financial future. However, there are alternatives that allow you to repay your debts and get back on stable financial ground without declaring bankruptcy. One option to consider is debt restructuring.

What is Debt Restructuring?

Debt restructuring involves working with your creditors to change the terms of your debt repayment. The goal is to create a new payment plan that reduces your monthly payments to a more affordable amount. This allows you to pay back what you owe over an extended period of time while avoiding bankruptcy.

As part of the restructuring process, your interest rates and fees may be lowered. The total amount you owe could also be reduced through settlement negotiations. This makes the debt easier to repay. Your creditors may agree to these new terms because they want to ensure they receive at least partial repayment rather than risk nonpayment if you file for bankruptcy.

Common Types of Debt Restructuring

• Debt consolidation – Combining multiple debts into one new loan with lower monthly payments
• Debt settlement – Negotiating with creditors to pay a lump sum that is less than what you owe
• Debt management plans – Working with a credit counseling agency to set up a repayment plan approved by your creditors

Benefits of Debt Restructuring Over Bankruptcy

There are several advantages to debt restructuring compared to filing for bankruptcy:

Avoid Damage to Credit Score

Bankruptcy can remain on your credit report for 7-10 years and severely lower your credit score. Debt restructuring allows you to repay debts without a bankruptcy filing on your record. This helps safeguard your credit score.

Keep Your Assets

In bankruptcy, nonexempt assets like your home, car, or retirement savings could be liquidated to pay creditors. With debt restructuring, you get to keep your assets while setting up more affordable repayment terms.

Lower Interest Rates and Fees

As part of restructuring, creditors may agree to waive certain fees, lower your interest rates, or reduce the total amount you owe. This cuts down the total cost of repayment.

Customized Payment Plans

Bankruptcy follows a rigid process with set repayment plans. Debt restructuring allows you to work directly with creditors to develop customized payment arrangements based on your unique financial situation.

Prevent Lawsuits and Wage Garnishment

If you fall behind on debts, creditors may file lawsuits to attempt to collect. They can even garnish your wages. By restructuring your debt, you show good faith effort to pay what you owe and creditors are less likely to take legal action.

When is Debt Restructuring a Good Option?

If you are facing financial hardship but bankruptcy does not seem warranted, debt restructuring may be a smart financial move. Signs it could help you:

• You can afford lower monthly payments but not what you currently owe
• You have assets creditors could seize if you file bankruptcy
• You have a steady income to dedicate to future debt repayment
• You want to avoid long-term damage to your credit score

The Debt Restructuring Process

1. Review your budget and debts

Make a detailed list of your income, expenses, assets and all debts owed. This gives you an accurate overview of your finances to inform negotiations.

2. Contact your creditors

Reach out to each creditor directly to explain your financial hardship and desire to restructure repayment terms. Be prepared to provide information to substantiate your situation.

3. Negotiate new repayment plan

Present creditors with a proposed new repayment structure based on what you can afford monthly. Be realistic. Aim to offer them terms that ensure they recoup at least part of what is owed.

4. Get any agreement in writing

Have a written agreement drafted detailing the new repayment plan terms and have it signed by both you and the creditor before beginning payments.

5. Make payments per new agreement

Be diligent in making your new debt payments on time and in full each month. This shows good faith and compliance with the negotiated terms.

Getting Help Restructuring Your Debt

It can be difficult to navigate the debt restructuring process on your own. Nonprofit credit counseling agencies can offer guidance and mediation help. You can also work with a debt management lawyer who has experience negotiating repayment plans with creditors.

The right help will allow you to restructure your debts, avoid bankruptcy, and regain control of your finances. Explore your options for assistance so you can find an affordable debt repayment solution.

Resources

• Reddit Personal Finance Community – Ask questions and get feedback from others managing debt.
• Quora Debt Restructuring Topic – Access advice on debt restructuring from financial experts.
• Avvo Debt Settlement Lawyers – Find qualified local lawyers to assist with debt.