Debt restructuring is the change in an existing debt relationship. Most of the time, this is done by reducing existing interest or principal payments. Debt restructuring therefore serves to reduce the repayment burden in order to prevent private over-indebtedness or to expand entrepreneurial or governmental scope for action.
When is debt restructuring possible and sensible?
It is often necessary to increase the amount of the debt. This is usually done through a new obligation. This can reduce the term of the debt and the repayment burden proportionally. By engaging one or more new creditors, debt restructuring measures are part of the external restructuring.
The relief can be achieved by switching from a fixed interest rate to variable interest rates. Another option is to agree on a new refinancing basis with the creditor. The effect is shown here in lower interest rates. In addition, interest and repayment charges can be mitigated by suspending or extending repayment periods or periods. Switching to types of repayments, such as bullet payment , where repayments are only made at the end of the term, can also lead to such a result.
Rescheduling on a lower-interest loan
Debt relief or deferral should not be confused with debt restructuring. The obligation relationship is not changed in either case. An exception to this is the extension of the term due to the deferral, since this requires a change in the contractual relationship. In order to be successful in rescheduling, it is important for the debtor to keep an eye on the notice periods for the loans.
Fixed-rate loans can be canceled six months before the end of the fixed interest period; floating rate loans within a quarter of a year. If a loan agreement is terminated before the fixed interest period expires, a prepayment penalty is usually incurred. If the planned interest rate savings are higher than the specified prepayment penalty, rescheduling on a lower-interest loan before the end of the fixed interest rate is often worthwhile.