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Debt restructuring is a good idea when a business can’t repay its debt.
Debt restructuring is the kind of financial arrangement made with creditors to pay back your loan as soon as is possible. This may be done by giving new terms like repayment extensions or lower interest rates, among others. Creditors may also suggest debt consolidation which uses one single credit line to combine different debts and make those payments simpler.
Many companies that need good financial support and backing go through bankruptcy and out-of-court restructurings because it helps them avoid legal processes and timeframes that could be harmful to their businesses. Creditors do not want to see their potential clients fail; they will accept any offer if it means they get a portion of their money back.
Contract law governs how a deal is structured and enforced. If one side fails to fulfill their part of the contract, then things may go into default or foreclosure which can have huge impacts on businesses. This is why settling debts before it gets out of hand would be the best idea. However, this may not always be possible because there are times when companies know more about what’s going on in their businesses than creditors do so sometimes negotiations don’t work out well for either party.
Debt restructuring is not a good idea when:
- A creditor has already assessed that a business cannot repay its debt and foreclose on assets with value (like land and equipment) to give creditors a chance to recover money before the company goes bankrupt and sells off all its assets.
- A creditor has already assessed that a business cannot repay its debt and now wants to charge additional fees.
- Creditors have been lenient with their clients for too long, giving them time extensions as well as reducing interest rates but they are still struggling to pay off loans. At this point, it is unlikely that they will be able to successfully finish what they’ve started because of poor management decisions.
- Debt restructuring may become a bad idea when there’s little hope left for a client to pay back debts in good time or at all. would also be a bad idea if the company has not been actively dealing with the reasons they have repayment problems.
- Debt restructuring is a bad idea when creditors are being forced to take part in it or when there’s no proof that they will get their money back.
- Changing covenants without paying attention too much to what exactly you are changing can lead to increased risk for lenders who may find themselves in bad situations with reduced security and higher interest rates.
- When most companies go through bankruptcy, some financial arrangement may be made but this does not mean it will work out well because after all, the chances of businesses surviving rough times are slim. Sometimes, even successful people end up broke due to bad investments and risky deals which fail badly.
Sometimes, creditors and businesses come to a compromise deal where they agree that it is best to stop business for good. During this time, the company will be left with little or nothing, and creditors will still try to recover their money in whatever way possible.
Debt restructuring gives the chance of dealing with repayment problems without going through bankruptcy procedures which can save companies from bankruptcy and potential losses. However, there are times when debt restructuring becomes bad; like when negotiations do not work out between parties especially if one side does not take things seriously or if debts cannot be repaid on time anyway. It may also become worse when the ability to repay loans has already been lost even before negotiations have begun.
Dr. Brown is the founder of Jotscroll, he is a Medical Doctor, Entrepreneur, and author. Dr. Razi Brown holds a medical degree from the University of San Diego. He has invested in many startups and is currently working on his fifth book to be published in the upcoming year.