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Your Personal Finances: What Is the Difference Between Debt Consolidation and Debt Restructuring?

Debt remains a problem in America today. The Federal Reserve Bank of New York reported consumer debt in the country reached $12.84 trillion during the second quarter of 2017. This is the highest it has been since the third quarter of 2008 when the great recession was just starting.

The major problem appears to be credit card debt. Credit card balances are climbing and more people are falling behind on their payments. Home mortgages are further increasing in terms of the balance owed. For these and other reasons, many people wish to get help today and obtain some relief from this burden.

Debt Consolidation

Debt consolidation is one method used to get debt under control. The debtor chooses to take out a single loan to refinance several debts, possibly lowering the interest rate in the process. If a lower rate is obtained, the debt can be paid off in a shorter period of time.

One major benefit of choosing debt consolidation according to debtors is they now only have one payment to make each month. This ensures the payment is not missed. When multiple creditors must be paid, it’s easy to overlook one. As a result, the debtor may find that his or her overall debt burden increases due to late fees and other penalties.

Debt Restructuring

In contrast, debt restructuring is a process in which the debtor and creditor come together and reach an agreement on a reduced amount the debtor will pay to settle the debt. Often, this process is facilitated by a credit counselor. The counselor works with the creditors to come to an amount both parties are comfortable with and advises the debtor on how to avoid similar issues in the future.

The Similarities

Debt consolidation and debt restructuring are both designed to help a person bring their debt under control and make it more manageable. The current loan payment terms and amounts will change regardless of which option is selected. Furthermore, borrowers will be required to pay on the debt with the major difference being the amount that must be repaid.

The Differences

With debt consolidation, a new loan must be taken out to settle the debt. A borrower who is behind on payments may find he or she cannot secure a new loan due to a low credit score. This isn’t a concern with debt restructuring as the goal is to negotiate existing debt to reduce the balance and pay it off sooner.

Debt consolidation is a process that may be undertaken at any time. The debtor does not have to get behind on payments to select this debt-relief option. In contrast, creditors typically won’t discuss debt restructuring until a debtor has fallen behind on payments.

An individual’s credit score may increase with debt consolidation. The borrower must make all payments on time in order for this to happen. Debt restructuring, on the other hand, only happens when the debtor has become delinquent on the debt which hurts his or her credit score. The score may not rebound for several years after this occurs.

What Debtors Need to Understand

Debtors often think debt consolidation and debt restructuring are two completely different processes. However, they are from the same family because debt consolidation is one way to restructure one’s debt. However, there are others which is why the two are not one and the same.

Debt restructuring, regardless of what method is selected, is to provide the borrower with better terms to make it easy to pay off this debt. Either the total number of payments to be made will be reduced through debt restructuring or the amount owed in terms of the payment and interest will be reduced. Another option a debtor may wish to consider is debt settlement.

Most debt consolidation loans are actually personal loans. The reason they are referred to as a debt consolidation loan is that they are specifically used for this purpose. Debt restructuring is an overall term that can refer to many things with debt consolidation being only one.

Which Option is Best?

Debtors often wish to know which option is best. There is no one answer to this. The right solution for a debtor depends on his or her specific financial situation.

Debt consolidation can be of help in increasing a person’s credit score by allowing him or her to pay off high-interest debt first. However, a new loan will typically have a negative impact on the person’s credit score. The new debt means the debtor is a higher risk in the eyes of creditors.

Debt restructuring also negatively impacts the borrower’s credit score. The individual will need to get behind on payments before this option can be used. Any late payments bring the borrower’s credit score down.

What debtors need to remember at this time is both methods will allow debt to be cleared over time. Debt restructuring will be of help to business owners who have fallen into debt and are missing payments as a result. Debt consolidation, however, is better for those who are able to pay their bills but need money to expand and find they cannot obtain it due to their existing debt load.

Both methods can be used in conjunction to get a better deal. For instance, a person may choose to work with creditors to bring their debt loan under control. Once this step has been completed, the debtor could choose to secure a personal loan to pay off this reduced amount and only have one payment each month.

One option is not better than the other. It all depends on the person’s financial situation. The debtor needs to consider how much is owed, what type of debt is held, his or her credit history, and more. Other factors to take into account at this time are employment status and one’s room to negotiate.

Keep in mind either option can be of help in overcoming overwhelming debt. If determining which option is best is too difficult, don’t hesitate to seek outside advice. A financial professional can be of great help in explaining the benefits and drawbacks of each option as they relate to your personal financial situation.



Arnel Ariate is the webmaster of Money Soldiers.

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