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HomeBlog BlogDefining The Fine Line Between Debt Consolidation And Debt Restructuring
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Defining The Fine Line Between Debt Consolidation And Debt Restructuring

December 11, 2016 by Adam Tijerina

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debt consolidation vs debt restructuringDebt consolidation and debt restructuring should be treated as two separate options to solve your debt situation. Unfortunately, a lot of consumers fail to identify the difference between the two. These two debt relief options are used interchangeably and you cannot really blame them for the confusion.

The truth is, when you consolidate your multiple debts, you are actually restructuring it. As long as you are changing something in your debt, it is easy to think of it as debt restructuring.

For those who do not want to be confused will actually just accept that these two are one and the same. But if you really want to make a smart choice when it comes to your debt solution, it is important for you to define the similarities and the difference between consolidating and restructuring debts.

What is debt consolidation?

Debt consolidation, as the name suggests, is a debt solution that combines multiple debts into one. You can combine your credit card debt, personal loans, medical bills and even your home loan into one. Instead of monitoring a lot of credit and loan accounts, you only have to think about one monthly payment. This payment may or may not be bigger than what you used to pay. It all depends on the type of consolidation strategy that you will use.

There are several options when it comes to consolidating debts.

  • Balance transfer card. This option involves a new credit card that will be offered to you with a very low or zero percent interest rate. This offer is only good for a couple of months. This is meant to entice new clients. In case the offer is appealing enough, you can transfer your high-interest credit card debts to this new account. You have to pay a balance transfer fee that is usually 3% of the debt you are transferring. Once this is done, you need to pay your debts aggressively so you can take advantage of the interest rate. After the promo period, the card will have a high-interest rate – which can make it hard for you to pay it off again.
  • Debt consolidation loan. This is when you borrow an unsecured loan that you will use to pay off your multiple debts. To make this beneficial to your finances, it is important to have a good credit score. This will help you secure a low-interest rate on the loan. This loan can be borrowed from any lender – a bank, credit union, peer-to-peer lending sites, and other online banks. You need to make sure that you will find the best Company who can help you solve your debt situation. For instance, debt consolidation made easy with nationaldebtrelief.com is one of the options that you can find. This company has an A+ rating with the Better Business Bureau.
  • Home equity loan. This is another option to consolidate debt. You will use the equity that you have in your house to borrow a loan. Since this is a secured loan, you can get a low-interest rate. You just have to be careful with this because if you fail to pay off this loan, you could end up losing your house. You do not want to compromise your home just because you cannot control your credit card spending.
  • Debt management. Finally, you can consolidate debt by hiring a credit counselor to assist you in creating a Debt Management Plan (DMP). This involves a new repayment plan that takes into consideration how much you can afford to pay each month. This will be presented to the creditors and lenders. If they approve, you will send your payments to the counselor as a single amount. They will be responsible for disbursing the money to the different credit accounts. You have to be careful in following the DMP because failure to follow it will take you back to the original terms with the different lenders.

What is debt restructuring?

Debt restructuring, on the other hand, is all about negotiating better terms. The goal is to restructure your debt so it will have better terms that will make it easier for you to completely pay off your debts.

Consumers often mistake debt restructuring as a part of the consolidation process. While there are similarities, there are also a lot of differences. It is important for a borrower to understand these differences because it will help them determine which option is better based on their specific financial situation.

Usually, a borrower is enticed to restructure their debts because they cannot afford to pay it based on the original terms. This is actually ideal for those who are going through severe financial situations – like those who are contemplating on bankruptcy. The key to making this work is to make the lender should feel like they will get more if they agree to restructure the terms of the debt. After all, if they do not agree to restructure your debts, lenders might not get anything if you filed for a Chapter 7 bankruptcy.

You will also notice that this sounds a lot like debt settlement as well. While there are similarities, they are still quite different. Debt restructuring is actually used by those who applied for a Chapter 13 bankruptcy. This type of bankruptcy is ideal for those who do not pass the means test that will make them qualify for Chapter 7 bankruptcy and those who have a lot of assets that they want to protect. This bankruptcy process will require the borrower to repay their loans using a repayment plan that the bankruptcy court (through the trustee) will require of them. This is why an attorney is usually required during these cases.

This type of debt solution could end up giving you a repayment plan that you will pay monthly or the ability to pay a lump sum amount and have the rest of your debts discharged or forgiven. Of course, any amount that will be discharged or forgiven will be considered taxable income.

How are debt consolidation and debt restructuring similar?

There are many ways that debt consolidation and debt restructuring is the same.

Both can help borrowers struggling with monthly payments. These two options will help make your monthly payments easier. Obviously, you want to enter into a debt relief program because it is hard for you to meet your current terms.

Both will change your repayment. When you consolidate, you are simplifying your repayment because you are combining multiple credit accounts into a single payment. When you restructure your debts, you are negotiating for better terms so the monthly payments or lump sum will only pay off a portion of the debt. That is how both options can change the repayment plan of the debts.

Both offers an opportunity to lower your interest rate. If you have a good credit score or if the negotiation works in your favor, you can end up with a lower interest rate. In fact, this should be a top priority. If you cannot get a low-interest rate on the new loan or terms, then it is better to avoid debt consolidation or restructuring.

Both will help you completely pay off your debts. Debt consolidation and debt restructuring are effective means to get out of debt – if it suits your debt and financial situation. Not only that, if you can discipline yourself enough to follow through with the rules of these debt solutions, then you can completely pay off your debts.

Both may or may not require a debt professional. If you want to work with a professional during debt consolidation, you can opt for debt management. In case you can go without one, you can choose debt consolidation loan, home equity loans, or balance transfer. You also have the same option if you decide to opt for debt restructuring. Ideally, though, you should get the help of a lawyer.

How do debt consolidation and debt restructuring differ?

Debt consolidation and debt restructuring also have a couple of differences.

Number of debts. Debt consolidation, as the name suggests, will combine debts. That means it involves multiple debts. Debt restructuring, on the other hand, does not require it. While it works best when you use it on multiple debts, it is possible to use it even if you only have one debt.

Debt payment. When it comes to debt payments, debt consolidation will require you to pay off all your loans. Not only that, you will be expected to pay in installments each month. Debt restructuring can end up giving you debt reduction if the negotiations end up in your favor. There may be times when you can pay off the debt in monthly installments. However, it is also possible for you to make a lump sum payment and have the rest of the debt discharged or forgiven.

Financial situation. Most of the time, debt consolidation will require you to have a stable income that can help you pay off all your debts. You need to prove that this is something that you can do because you may not get approval to consolidate. This is why a strong financial position is usually required. For debt restructuring, you do not need this. It is understandable and even expected, that you are going through a tough financial situation. In fact, most people who need debt restructuring are usually on the brink of bankruptcy.

Credit score effect. The credit score effects will also be different between the two. When you consolidate your debts, your score may be affected but it is usually very minimal. Restructuring your debts will end up compromising your credit standing because it will lead you to reduce your debts. Even if you pay off your debts, it will be reflected in your credit report that a portion of it was discharged or forgiven. That can affect your credit score. Of course, you can still improve that score so if you do not need a good score at the moment, then this should not bother you.

Tax implications. Debt consolidation will not affect your taxes. However, debt restructuring has tax implications because of the discharged or forgiven. Any debt amount that you do not have to pay will be considered taxable income.

What are the advantages and disadvantages of debt consolidation?

Before you opt for debt consolidation, you have to understand the pros and cons of this debt relief program. When it comes to advantages, here are the reasons why people opt for debt consolidation.

  • It gives you a low-interest rate. When you consolidate debt through a balance transfer card or loan, you need to ensure that you will get a lower interest rate. In case you will go for debt management, you should try to negotiate a lower interest rate through the credit counselor.
  • It helps rebuild your credit score. At least, this is true if you meet the payment terms of the consolidated debt. You are not only paying off the debt, you are also improving your credit report.
  • It simplifies your multiple payments. Instead of worrying over different due dates you only have one monthly payment to worry about. This will lessen the chances of missed or late payments.

Apart from the advantages, you should also consider the disadvantages of consolidating your debts.

  • It could make you pay high fees. With a balance transfer, you need to pay a fee that is equivalent to 3% of the amount that you will transfer. In debt management, you also have to pay professional fees. This is actually just a minimal amount that is no more than $50 a month. But if the DMP will last for 3-5 years, that $50 will add up to $1,800 to $3,000 worth of fees. In case you decide to borrow a loan, you still have to pay the origination and underwriting fees. Of course, there are lenders who can waive this so make sure you are ready to negotiate.
  • It is not a quick fix. If you want to get out of debt quickly, consolidating is not the right option for you. This is a debt solution that will make you pay for the whole debt because there will be no reduction of any kind. The more debt you have to pay, the longer it will take for you to finish.

It is very important for you to look at debt consolidation reviews so you can see different views about opinions about your options to consolidate debt. It is better to get feedback from those who have actually gone through the different strategies because you can learn from their own experiences. This is also a great way to choose the right lender or credit counselor to assist you in consolidating your debts.

What are the advantages and disadvantages of debt restructuring?

In case you want to give debt restructuring a try because you believe that it is the perfect solution to your specific financial situation, you need to get to know the advantages and disadvantages first. Here are the advantages of using this debt solution.

  • It gives you a more structured debt agreement. Using this option in bankruptcy will make you and the various lenders agree to an official repayment plan. If it is ordered by the court, everyone is forced to cooperate – including you. That would make everything go more smoothly and harmoniously.
  • It allows you to bundle payments. This is one of the benefits of restructuring debts – you can bundle your payments so it is easier to monitor. It is possible to negotiate this with your creditors and lenders so you are left with a single monthly payment.
  • It can lead to a lower interest rate. One of the main reasons to negotiate with lenders is to get a lower interest rate. This will help you save a lot of money during the course of the repayment.

While these advantages are great, you should also get to know the disadvantages of debt restructuring.

  • It makes you pay taxes. If you successfully negotiate for a portion of your debts to be discharged or forgiven, you will be required to pay taxes for it. This reduction is considered taxable income.
  • It compromises your credit standing. If you use this in bankruptcy, that will be reflected on your credit history for the next 10 years. While its influence on your creditability will decrease over time, this might be a hindrance to those who wish to use more credit in the near future.
  • It can only include certain debts. You cannot restructure all types of debt. Student loans cannot be included in debt restructuring bankruptcy. While it could help you negotiate better terms, it cannot be discharged or forgiven.

Consider all of these when you are choosing between debt consolidation and debt restructuring. While these two options are legal and effective ways to get out of debt, they have their own effects on your financial future. Consider your specific debt and financial position and the goals that you want to reach in the future before you make a decision.

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Adam Tijerina

Adam Tijerina

Adam Tijerina is a personal finance expert for National Debt Relief, a BBB A+ accredited business offering debt settlement services since 2009. Adam knows a thing or two about debt resolution after successfully settling $43,250 in credit card debt on his own. He has also co-authored two books about overcoming adversity and has been featured on Credit.com and USNews.com. Adam holds a Bachelor’s Degree from Trinity University and lives in Texas with his wife and four children.

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Filed Under: Blog Tagged With: Debt consolidation, debt consolidation loan, debt consolidation loans, debt restructuring

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