What Is Debt Restructuring?

Debt Restructuring Explained

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Debt restructuring is a process that begins when an individual reaches out to a creditor to negotiate either a lower interest rate or an extended payment schedule for their outstanding debt. An individual may decide to pursue debt restructuring on their own or with the help of a reputable debt relief agency.

To be able to eventually settle your debt, it’s important to know exactly how debt restructuring works, what working with a lender looks like, and when to consider working with an agency. 

Definition and Examples of Debt Restructuring

Debt restructuring is a process in which a person or company negotiates a lower interest rate or an extended term for a loan through direct contact with the lender or through the help of an agency. When a creditor changes the terms of a loan for an individual, the creditor is restructuring the debt. 

A home mortgage loan modification is one example of debt restructuring for individuals. In a home loan modification, the terms of the mortgage are renegotiated by the homeowner and the lender, thus reducing the cost of the mortgage. Loan modification can save homeowners from foreclosure and possible bankruptcy. To be eligible, homeowners must meet certain debt-to-income ratio expectations, and in some cases, complete a trial payment plan. 

The trial payment is the agreed-upon amount that a homeowner would pay once the modification is final. Trial payment plans typically continue for three months, wherein the mortgagee must pay each amount on time.

Modification is different from refinancing an existing mortgage. A modification changes the terms of an existing loan, while a refinance pays off an existing loan in exchange for a newer loan with better terms. 

Other types of debt restructuring include interest rate reductions or modified payment plans for credit card balances. Such plans help consumers afford their debt by allowing a reduction in the interest rate or monthly payment amount.

Filing for bankruptcy is another option for those struggling to repay their debt; however, it comes with consequences. For instance, information from Chapter 7 Bankruptcy will stay on your credit report for 10 years, often making it difficult to get life insurance or buy a home.

How Debt Restructuring Works 


Debt can be restructured in several ways, including the debtor offering assets, such as real estate or equity, to the creditor to satisfy the debt either fully or in part. Other restructuring is achieved through modifications to the line of credit or loan by lowering the interest rate or extending the repayment period.

“If you’re finding it difficult or impossible to make your debt payments, it is worth looking into debt restructuring,” Maggie Germano, a Washington, D.C.-based personal finance expert and financial coach, told The Balance via email. “This is especially true if you have a low credit score or negative credit history, which makes it less likely you’ll be able to successfully consolidate your debt.”

If you are interested in seeking help from a debt relief agency instead of pursuing debt restructuring on your own, the U.S.Department of Justice has a list of reputable agencies available. Some debt relief agencies are actually scammers, so it is important to do your research prior to choosing an organization to work with.  

To start the debt restructuring process, contact your creditors immediately to negotiate new terms or seek the aid of a reputable debt relief agency. Do not wait until your debt has been turned over to debt collectors. Once that happens, your creditors will most likely not negotiate with you. 

If you work with a reputable debt relief agency, that organization will negotiate new terms for you. The agency will work with creditors to reduce interest rates, extend the payment timeline of certain types of loans, and possibly settle some outstanding debt.

Troubled Debt Restructuring

In some cases, an individual or company may go through troubled debt restructuring (TDR), which is different from traditional debt restructuring. The term refers to modifications to a loan either negotiated between the debtor and the creditor or imposed by a court ruling. 

To qualify for troubled debt restructuring, a debtor must:

  • Have an existing credit agreement in place to be renewed, extended, or modified
  • Prove they are experiencing financial difficulty 
  • Receive concession from a lender, which could include lowering the effective interest rate, principal, or interest, modifying repayment requirements, and waiving previous financial promises to increase cash flow. 

Key Takeaways

  • Debt restructuring is the process in which an individual negotiates with a creditor to lower interest rates or extend terms for payment of their debt.
  • Individuals can negotiate terms of a debt payment plan themselves or with the help of a reputable debt relief agency.
  • Debt restructuring is an alternative to forbearance, foreclosure, and bankruptcy.