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How Debt Restructuring Can Impact Your Credit Score

Dealing with debt can be really stressful. Like, trying to manage payments while juggling other expenses is tough. And if you’ve fallen behind, it can feel kinda overwhelming trying to catch up. I totally get it – I’ve been there myself.If you’re looking into options like debt restructuring, you probably have some questions about how it could impact your credit. That’s understandable! Your credit score plays a big role when it comes to stuff like getting loans or credit cards, so you wanna make sure any decisions you make don’t mess things up further down the line.I wanted to give a quick rundown on how debt restructuring works and what it means for your credit score. Hopefully this info helps provide some clarity so you can make the best choice for your situation!

What Is Debt Restructuring?

Debt restructuring basically means changing the terms of your debt in order to make payments more affordable. This can be done a few different ways:

  • Debt consolidation – Taking out a new loan to pay off multiple debts, simplifying things to just one monthly payment
  • Debt settlement – Working with creditors/collection agencies to pay a lump sum that’s less than what you owe
  • Debt management plans (DMPs) – Getting a credit counseling agency to negotiate lower interest rates and monthly payments

The strategy that makes the most sense depends on your specific circumstances. But in general, the goal is to reduce monthly payments and get debt paid off faster.

How Debt Restructuring Impacts Your Credit Score

When you restructure debt, your credit score is likely to take a hit in the short term. Here are some key ways it can impact your credit:

1. Late Payments Remain on Your Credit Report

If you have late payments already reported from before restructuring debt, those can stay on your credit report for up to 7 years. Even if you enroll in something like a DMP, previous late payments aren’t erased. So that history can still ding your credit score for a long time.

2. Credit Utilization May Increase

When you consolidate debt, this can increase your total credit utilization since you’re borrowing a large lump sum. Higher credit utilization (using more of your total credit limit) tends to lower credit scores.

3. Closed Accounts Reduce Total Credit

As old credit card and loan accounts get closed out as part of restructuring, this can reduce your total available credit. And that has a similar effect of increasing overall utilization, resulting in credit score drops.

4. New Inquiries Show Up on Credit Report

Applications for things like debt consolidation loans or balance transfer cards require creditors to check your credit report using a “hard inquiry” . Too many hard inquiries in a short span can lower your credit score temporarily.

5. Changed Payment History

For unsecured debts that get restructured (like credit cards), your original payment history doesn’t transfer over to the new consolidated account. So even if you were always on-time before, as far as your score is concerned you’re starting from scratch.

How to Minimize Credit Score Damage

While debt restructuring often leads to an initial credit score drop, the good news is the impact is usually short-term. And if done right, it can help in the long run by getting debt paid off faster. Here are some tips to minimize damage:

  • Pay off debt ASAP – Set up a budget and commit to paying off your restructured debt fast. Eliminating balances ASAP will help offset credit score drops over time.
  • Avoid new credit – Try not to open any additional credit cards or loans until after you’ve paid down restructured debt. Too many new accounts can worsen score drops.
  • Consider credit counseling – Getting help from a nonprofit credit counseling agency can allow you to avoid things like debt settlement that appear very negatively on credit reports.

Over time as you pay down balances, credit damage should start to reverse. Most people see their scores gradually recover within 1-2 years after restructuring debt.

The Bottom Line

Debt restructuring often makes good financial sense to get overwhelming payments under control. But before moving forward, be sure you understand and prepare for the potential temporary credit score drops.With a patient approach focused on paying off restructured debt ASAP, you can get back on solid ground. And within a couple years, your credit should rebound as well.Hope this overview gives some helpful perspective as you’re weighing options! Let me know if any other questions come up.


Reddit discussion on debt restructuring definition: https://www.reddit.com/r/personalfinance/comments/j08a0q/what_is_debt_restructuring/Quora post explaining debt consolidation: https://www.quora.com/What-is-debt-consolidation-1Avvo article on how debt settlement works: https://www.avvo.com/legal-guides/ugc/what-is-debt-settlementFindLaw overview of debt management plans: https://www.findlaw.com/consumer/debt-management-plan/what-is-a-debt-management-plan-.htmlLate payments stay on credit reports (NerdWallet): https://www.nerdwallet.com/article/finance/late-payments-credit-scoreIncreased utilization lowers credit score (Experian): https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/Hard inquiries short-term impact (Equifax): https://www.equifax.com/personal/education/credit/score/hard-inquiries-and-your-credit-score/Debt restructuring and payment history (myFICO): https://www.myfico.com/credit-education/faq/fix-credit/debt-settlementNonprofit credit counseling to avoid score damage (NFCC): https://www.nfcc.org/resources/blog/debt-settlement-vs-debt-management-which-one-is-right-for-you/Credit score recovery time after restructuring (Lexington Law): https://www.lexingtonlaw.com/blog/credit-repair/debt-settlement-credit-score.html

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