Debt Restructuring and Obligations

Sometimes you can’t manage your debt; usually, it’s because the total monthly payments are too high, but it can also be because there are simply too many creditors—too many separate bills—to pay and you lose track. When that happens or is danger of happening, you should look to restructuring your debt in some way.

Debt Consolidation

One option is debt consolidation: take multiple different debts and combine, or consolidate, them into one debt. This is typically done by taking out a single large loan to repay several other loans. There are several advantages to debt consolidation, including potentially lowering the interest rate, extending the time to repay, and replacing non-tax-deductible debt (such as credit card debt) with tax deductible debt (such as a home equity loan). However, taking out a new loan also involves various loan origination fees and costs; and once debt is consolidated, it can no longer be paid off piecemeal.

Reducing Debt

Debt reduction is simply paying off debt. Say you owe $60,000 total, made up four separate debts of $15,000 each. If you were lucky enough to come into $15,000, you would generally do far better to pay off one debt entirely than by reducing each debt by $3,750, since once a debt is paid off, it no longer accrues interest. Debt reduction is simply being very deliberate and intentional in managing your debt; it’s taking a focused approach to payment. However, some debt has prepayment penalties, which need to be considered.

Note that both debt consolidation and debt reduction are things you do yourself—you don’t need your creditor(s) to agree to them.

Debt Relief

Debt relief is getting a creditor to agree to one or more of the following:

• extending the time to pay;
• reducing monthly payments;
• reducing the interest rate; or
• reducing the amount owed.

It involves the active cooperation of the creditor, and therefore involves negotiation, which centers on showing how with relief, the creditor will be paid most of what they’re owed—whereas without relief, the debtor may default or declare bankruptcy. Sometimes there are state or federal programs to encourage lenders to provide relief, as with some of the programs out there to encourage mortgage relief.

Debt Settlement

Similar to debt relief, this is getting the creditor to agree to a reduction. In debt settlement, the creditor will agree to take a lump sum payment for less than the amount owed as payment in full of the debt. A “short sale” of a home that’s underwater on its loan is form of debt settlement.

Debt Restructuring Legal Assistance

Not only can an experience debt restructuring attorney help you understand your debts—your rights and obligations under your debt agreements—but he or she can negotiate with creditors on your behalf. Even more, if you do come to an agreement for debt relief or debt settlement, the attorney can make sure that documents are drawn up that will fully protect your rights and discharge the debt.