How Does Debt Restructuring Work?

How Does Debt Restructuring Work?

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When you’re struggling to keep up with your debt, you may feel like you’re drowning. Late fees can start racking up and you might be hounded by calls from bill collectors. It can feel like there’s no way out.

Debt restructuring can provide you with some much-needed relief so you can get back on your feet. Debt restructuring can mean wiping away your debt in bankruptcy or working with your creditors to reduce the amounts owed or lower your interest rate.

While debt restructuring may sound appealing, it’s not for everyone. It’s important to understand how it works and what the drawbacks are for you.

What is debt restructuring?

Debt restructuring can take different forms, according to Kim Cole, a community engagement manager with Navicore Solutions, a nonprofit financial counseling agency.

“Debt restructuring is a broad term,” she said. “Essentially what it encompasses is settling debt through a debt management program with a reduction in interest or reduction in the debt amount. But Chapter 13 bankruptcy is another form of debt restructuring.”

Here’s what you need to know about each debt restructuring approach.

1. Restructuring via a debt management plan

With a debt management plan, you work with a nonprofit credit counseling agency. The agency takes on the debt, and through their relationships with creditors, negotiate to reduce the interest on your accounts and consolidate your payments into one.

“With this approach, you’ll make just one monthly payment to the nonprofit credit counseling agency, and it will disburse the funds to the creditors,” said Cole.

To start the process, Cole recommended reaching out to a nonprofit credit counseling agency, such as Navicore Solutions or the National Foundation for Credit Counseling.

“I tell my clients that a debt management plan can be up and running within three months,” said Cole. “Creditors want to see three consecutive payments from borrowers as a sign of commitment before moving forward.”

2. Restructuring via bankruptcy

If you decide to restructure your debt through Chapter 13 bankruptcy, the process is quite different. With this approach, you go to court and the judge takes a look at your debt. In some cases, some of your debt may be wiped out completely, and the rest is restructured — often with a lower interest rate — so you can pay it off within five years.

Bankruptcy proceedings can take much longer than a debt management plan. If you’re considering this option, start looking for an attorney.

“Reach out to the local bar association for a recommendation for an attorney that specializes in bankruptcy law,” suggested Cole.

Advantages and drawbacks of debt restructuring

Regardless of which path you take with restructuring — entering into a debt management plan or declaring bankruptcy — there are some advantages and drawbacks you should be aware of first.


  • Collection calls stop: If your accounts were late and you were receiving collection calls, those calls will stop once you start restructuring your debt.
  • Damage to your credit score ends: According to Cole, damage to your credit score stops happening; under the debt management plan or bankruptcy ruling, you’re listed as current on your payments.
  • Ability to pay off debt in three to five years: With each approach, you have a date you can circle on a calendar for when you’ll pay off your debt, giving you peace of mind.


  • Long-term damage to credit report: If you declare bankruptcy, it will stay on your credit report for up to 10 years, making it difficult, if not outright impossible, to qualify for new credit.
  • Loss of access to cards: With a debt management plan and bankruptcy, you’ll lose access to your credit cards, according to Cole. Going forward, you’ll have to rely on cash until your credit improves enough that you can qualify for a new card.
  • High fees: If you work with a nonprofit credit counseling agency for debt management, fees are minimal. But if you pursue bankruptcy, you’ll have to pay out-of-pocket for attorney fees and court costs, which can be expensive.

When is debt restructuring the right choice?

Debt restructuring can sound like a lifeline when you’re sinking in debt. But Cole warns that it’s not a magical solution.

“Debt restructuring should not be entered into unless there’s a significant financial hardship” she said. “Interest rates may be high right now, but if you are able to comfortably maintain your payments, entering into debt restructure is not necessary.”

Debt restructuring should only be pursued when you’ve exhausted all of your other options.

What’s the difference between debt restructuring and debt consolidation?

Debt consolidation is a common way to tackle your high-interest debt. If at all possible, it makes sense to explore debt consolidation before pursuing debt restructuring.

With traditional debt consolidation, you take out a personal loan for the amount of your current debt. The new loan has a lower interest rate than your old credit card debt, so more of your payment goes toward the principal. Going forward, you have just one loan and one payment to remember, and you’ll be debt-free at the end of your loan term.

Debt consolidation is a smart strategy for those who still have good credit, as they can qualify for a low-interest loan. If your credit is already damaged, you may not be a good candidate for debt consolidation.

Managing your debt

If you’ve overwhelmed by your debt and feel like you’ll never be able to dig yourself out of the hole you’re in, debt restructuring can provide you with significant relief. However, restructuring your debt does have serious consequences, so it’s important to weigh the pros and cons and exhaust other options first.

Cole recommended going to a credit counseling agency. “Sit down with a counselor,” she said, “have them look at your budget, credit history, and debt to see what’s going on. They should give you an action plan of different courses you can take. They’re a third party with no incentive other than to help you get out of debt as soon as possible.”

If you need help paying off high-interest debt, check out these tips on paying down credit card debt.

Kat Tretina is a freelance finance writer and certified student loan counselor based in Orlando. She is focused on helping people pay down their debt and increase their incomes. Her work has been featured in publications like The Huffington Post, Entrepreneur, Forbes, and more.

The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.