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How To Determine If Debt Restructuring Is Your Best Option

By Spodek Law Group | February 20, 2024

How To Determine If Debt Restructuring Is Your Best Option

Assess Your Current Financial Situation

The first step is to clearly assess your current financial situation, including income, expenses, assets, and liabilities. This will help you understand how much debt you have and whether your current debt payments are sustainable.

  • Make a list of all your debts and your monthly payments for each one. This includes credit card debt, personal loans, medical debt, student loans, auto loans, mortgages, and any other money you owe.
  • Document your monthly income from all sources after taxes.
  • Track your living expenses like rent, utilities, groceries, transportation, and healthcare.
  • Look at your assets like savings accounts, retirement accounts, real estate, and cars.
  • Determine your net worth by subtracting your liabilities from your assets.

This debt and budget overview will show you how much wiggle room you have in your monthly cash flow and whether you have assets that could potentially help repay debts.

Putting all your debts, income, and expenses down on paper can clarify whether debt restructuring deserves a closer look,” says financial advisor John Smith. “It really lets you see the full financial picture.”

Evaluate If You Can Realistically Repay Your Debts

Once you have all the numbers down, evaluate if it’s realistic for you to repay your debts based on your income, expenses, and lifestyle over the next several years.

“Ask yourself—what amount can I reasonably afford to pay each month? And does my budget align with the payments and timeline for getting out of debt?” says Smith.

If your debt payments exceed 40-50% of your monthly income after basic living expenses, it can be very tough to catch up without some kind of relief.

Debt restructuring could be a lifeline that makes payments more affordable. But if you ultimately can’t repay the full amounts owed over time, you may need to consider options like debt settlement or bankruptcy down the road.

Understand Different Debt Restructuring Options

If your situation looks dire, familiarize yourself with different debt restructuring options so you can pursue the best route. Common ways creditors work with consumers include:

  • Hardship programs: Credit card companies and other lenders often have hardship programs to provide temporary relief. This may involve lowered interest rates, waived fees, and reduced payments for 6-12 months.
  • Debt management plans (DMPs): DMPs offered by nonprofit credit counseling agencies can consolidate debts into one payment and negotiate lower interest rates. This helps pay down principal faster.
  • Debt consolidation loans: Banks and online lenders offer debt consolidation loans allowing you to pay off debts under one new loan with fixed payments. This works best if you can get a lower rate.

“Each option has pros and cons to weigh based on your circumstances,” Smith advises. “Make sure you have a complete understanding before moving forward.”

Contact Your Creditors

Before pursuing formal debt restructuring plans, reach out directly to your creditors first to see if they can offer any assistance.

When you call, explain your financial hardship and lay out your income, expenses, and proposed monthly payments. Ask politely if they can lower your interest rate or waive certain fees temporarily to help you get back on track.

“It never hurts to call and ask—the worst they can do is say no,” says Smith. “Many major credit card companies have special departments to help customers create affordable repayment plans.”

Document details from these conversations so you know what relief each creditor may provide outside of larger debt management programs.

Consult Credit Counseling Agencies

For guidance on managing debt through restructuring, consult a reputable nonprofit credit counseling agency like the National Foundation for Credit Counseling.

“These agencies have certified credit counselors who can review your full financial profile and discuss whether debt restructuring could help resolve short-term cash flow issues,” explains Smith.

A counselor can outline plans available in your state and customize one to match your budget and goals. They serve as an intermediary with creditors and typically charge small monthly fees.

Work With An Attorney If Necessary

If your debts stem from issues like medical problems, unemployment, or other unforeseen circumstances beyond your control, consider working with a consumer protection attorney.

They can help you negotiate directly with creditors or pursue formal legal action if you face aggressive collections, harassment, or predatory lending practices.

“Consumers do have certain rights around debt repayment—a lawyer can advise you on the best path given your legal protections,” says Smith.

Prioritize Your Financial Health

Ultimately, the decision to restructure debt involves weighing short-term cash flow relief against your long-term financial best interests.

Work to shift spending habits and build emergency savings so you can weather unexpected expenses without sinking back into debt. And commit to healthy financial behaviors like tracking expenses, budgeting, and paying bills on time.

With discipline and a little help from creditors, debt restructuring can provide much-needed temporary relief. But your long-term financial health depends on learning how to manage debt sustainably.

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