Debt restructuring means the reallocation of resources or change in the terms of loan extension to help the debtor in repaying the loan to their creditor. Debt restructuring is a compromise made by both the debtor and the creditor to eliminate any short-term obstacles in the path of loan repayment. Debt restructuring consists of two types, and the restructuring methods can follow different paths.
Types of Debt Restructuring:
Debt restructuring is of two types, based on the terms and the expenses borne by the debtor.
1) General Debt Restructuring: Here the creditor does not suffer any losses in the process. This occurs when the creditor chooses to increase the loan period, or reduce the interest rate, thus allowing the debtor to overcome the short-term financial difficulty and clear off the debt in future.
2) Troubled Debt Restructuring: Troubled debt restructuring refers to the process where the creditor has to bear the losses. It occurs when the Debt Restructuring causes reduction in the accrued interest, or because of the reduction in the worth of the collateral, or through conversions to equity.
How to Work Out Debt Restructuring:
1. The creditor should draw a roadmap for the debt restructuring process. The strategy should cover the maximum time expected in order to recover the debts, the terms of loan repayment, and keeping a watch on the financial activities of the debtor.
2. The decision of the creditor concerning Debt Restructuring is based on whether the debtor is an investor in the company, holds shares of the company or is affiliated to the creditor.
3. In case of conflict of interest within the company’s board of directors concerning the process, it is advisable to seek help from a third party. But third party mediation is not required if the debtor is a subsidiary of the company.
4. Preparing a cash flow projection is also an essential part of the Debt Restructuring process. It is recommended to exclude uncertain cash flow estimates in the plan.
5. The debtor’s financial situation should also be looked at, when making a Debt Restructuring plan. The debtor’s capacity to repay the loan, as per their financial management, so the creditor should consider the debtor’s plan for repaying the loan. If the debtor is another company, then there can be a change of key people connected with it, such as the director, board of directors or chairperson may help.
If you want to undergo Debt Restructuring, as a creditor or borrower, you can get help from a small business consultant.
Debt restructuring includes various factors such as the debtor’s financial management, the expected cash inflow, the relation between the debtor and the creditor etc. Debt Restructuring is a way out for both the parties to solve their problems. It consists of compromises made by the creditor and the debtor to foresee that the loan is totally repaid to the creditor without harming the debtor financially.