Debt restructuring is a tool companies use to avoid default risks on lower rates of interest or existing debt. When you are nearing insolvency, debt restructure is an option for individuals and countries that are shortly to default on what is known as sovereign debt. Read on to learn more.
How Debt Restructuring Works
For example, a company may take several loans and restructure them in a hierarchy of payment priority. Often this means long term debtholders are paid before newer debtholders. Unsurprisingly, creditors are sometimes prepared to offer alternative debt management terms to avoid default or bankruptcy. The restructuring process normally involves prolonging the dates when debts are due, and/or reducing the interest rate on existing loans. Creditors realize they would receive less without the restructure. Obviously, this can be a winning solution for everyone in otherwise bad circumstances. Individuals can do this as well as businesses. But individuals need to check the legitimacy of any debt relief services they use as well as checking with a reputable consumer protection agency and the attorney general of the state.
Types Of Debt Restructuring
One option is known as a debt-for-equity swap. This happens when a creditor cancels part or all outstanding debts in return for some equity. This is often preferable when there are significant assets and debts, and the creditors would rather take control of a company undergoing tough financial times. Another option is called “taking a haircut” where part of the interest payments would be written off or part of the principal is agreed not to be paid back. Callable bonds are often used by companies to obtain protection and then can be redeemed when interest rates decrease. Therefore, the issuer can restructure debt in the future as the debt currently existing can be replaced with fresher debt and a lower rate of interest.
Other Examples Of Debt Restructure
Countries sometimes have sovereign debt threatening their solvency. Some countries restructure their debt and some use bondholders to do so. This may mean moving from the private sector to the public sector (this happened in the United Kingdom, post-WW2.) Sovereign bondholders may have to “take a haircut” and pay a percentage of the debt offering the government issuer greater time to access funds to pay bondholders. There is not a great deal of oversight to this but is less expensive than bankruptcy when an individual, business or country is in peril.
Speak With Our Bankruptcy Lawyers In Phoenix & Scottsdale
Canterbury Law Group should be your first choice for any bankruptcy evaluation. Our experienced professionals will work with you to obtain the best possible outcome. You can on the firm to represent you well so you can move on with your life. Call today for an initial consultation. We can assist with all types of bankruptcies including Business Bankruptcy, Chapter 7 Bankruptcy, Creditor Representation, Chapter 5 Claims, Chapter 13 Bankruptcy, Business Restructuring, Chapter 11 Bankruptcy, and more.
*This information is not intended to be legal advice. Please contact Canterbury Law Group today to learn more about your personal legal needs.