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The Role of Debt Consolidation in Restructuring

By Spodek Law Group | February 20, 2024

The Role of Debt Consolidation in Financial Restructuring

Debt consolidation can play a key role in helping individuals and businesses get their finances back on track during a restructuring. By consolidating multiple high-interest debts into one manageable payment, borrowers can simplify repayment, lower monthly costs, and pay off debt faster.

How Debt Consolidation Works

Debt consolidation involves taking out a new loan to pay off existing debts that have high interest rates. This consolidation loan typically has a lower interest rate and allows the borrower to make just one monthly payment instead of keeping track of many.Popular types of debt consolidation loans include:

  • Personal loans
  • Home equity loans or lines of credit
  • Balance transfer credit cards
  • Debt management plans

Borrowers work with a debt consolidation company or lender to determine the total payoff amount needed to settle existing debts. The lender then offers a consolidation loan for this amount, with repayment terms of generally 3-5 years. By extending the repayment timeline and lowering interest costs, the monthly payment is reduced to a more affordable level.Consolidating debt can provide a number of potential benefits during a financial restructuring:Easier Account ManagementRather than tracking five, ten or more separate credit accounts every month, there is just one consolidation loan payment to make. This greatly simplifies the repayment process each month.Lower Interest RatesMost credit cards and unsecured debts can have interest rates of 15-30% or higher. By consolidating these debts into a personal loan, for example, the interest rate could be cut in half to 7-15% resulting in substantial interest savings.Faster Payoff TimelineHigh-interest debts like credit cards can take many years to pay off when making minimum payments. A debt consolidation loan allows borrowers to pay more toward principal every month and shorten the payback timeline.Improved Credit ScoresAs consolidated debts are paid off, credit reports will show fewer delinquent or maxed out accounts which can boost credit scores. This makes it easier to obtain affordable financing in the future.

Using Debt Consolidation for Restructuring

During financial restructuring, debt consolidation can be an effective way for strained borrowers to regain control of debts and create a more sustainable budget.

For Individuals

Everyday Americans might consider a round of debt consolidation to make debts more affordable if they are facing situations such as:

  • Job loss or reduced wages
  • High medical bills
  • Large credit card balances
  • Other unexpected expenses

By working with a nonprofit credit counseling agency, individuals can enroll in a debt management plan (DMP) that provides:

  • Consolidated payment amount based on 3-5 year timeline
  • Negotiated lower interest on debts
  • More affordable monthly payment
  • Improved credit with timely payments

This allows stretched budgets to better handle essential expenses during the financial restructuring process.

For Businesses

Small business owners utilize debt consolidation to handle debts racked up due to:

  • Economic downturns and falling revenue
  • Expansion costs and loans
  • Unexpected circumstances like natural disasters or lawsuits

By working with a business financing advisor, suitable consolidation loans can be obtained to handle all business debts under one account. This allows the business to:

  • Free up cash flow by lowering monthly loan payments
  • Focus on stabilizing operations with simplified debt account
  • Improve chances of obtaining financing in the future

Debt Consolidation Process

The process of consolidating debt typically involves the following steps:

  1. Review debts – Compile details on all outstanding debts including the balance, interest rate and monthly payment. This provides an overview of the total payoff amount needed.
  2. Check credit score – Borrowers need good to excellent credit scores to qualify for affordable consolidation loans or terms. Check credit reports and dispute any errors to maximize approval odds.
  3. Choose consolidation method – Select the most appropriate consolidation loan or program:
    • Personal loans from banks or credit unions
    • 401(k) or pension loans
    • Home equity loans
    • Balance transfer credit card
    • Debt management plan
  4. Apply & choose lender – Submit loan applications to lenders offering the lowest interest rates and most favorable terms overall.
  5. Finalize consolidation – After being approved, accept final loan terms including repayment timeline, interest rate and monthly payment amount.
  6. Pay off debts – The lender pays out the loan directly to your creditors, paying off enrolled debts completely.
  7. Make new payments – Going forward there is just one monthly consolidation loan payment to handle all those old debts!

Tips for Success

When using debt consolidation as part of restructuring, it’s important to adopt habits that will lead to successfully becoming debt-free:

  • Make payments on time – Delinquent payments can ruin credit scores and setback progress.
  • Pay extra when possible – Adding just $20-50 monthly can knock years off payback timeline.
  • Avoid new debt – Stick to a budget that accounts for all monthly expenses and avoids unnecessary purchases on credit.
  • Save simultaneously – Build savings simultaneously so unexpected expenses won’t require more debt.
  • Celebrate progress – Stay motivated by tracking payoff progress and celebrating milestones.

Expert Financial Guidance

Seeking help from financial experts can improve the odds of successfully using debt consolidation to restructure:

  • Credit counseling agencies provide free or low-cost advice and debt management programs tailored to individual needs. Reputable agencies are approved by the National Foundation for Credit Counseling.
  • Debt relief companies like Freedom Debt Relief offer customized debt repayment solutions combined with expert support.
  • Bankruptcy attorneys can advise if legal protection is the best path forward and help develop bankruptcy filing strategy.

The path to financial freedom starts with one manageable monthly payment. Consolidating high-interest debts can be the first step toward regaining financial stability. With lower monthly costs and expert guidance, borrowers can restructure their finances and work toward being debt-free.

Resources

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