Loan restructuring is a process wherein a company or an entity experiencing financial distress and liquidity problems refinances its existing debt obligations in order to gain more flexibility in the short term and make their debt load more manageable overall.
Reason for Loan Restructuring
A company that is considering loan restructuring is likely experiencing financial difficulties that cannot be easily resolved. Under such circumstances, the company faces limited options – such as restructuring its debts or filing for bankruptcy. Restructuring existing debts/loans is obviously preferable and more cost-effective in the long term, as opposed to filing for bankruptcy.
How to Achieve Loan Restructuring
Companies can achieve loan restructuring by entering into direct negotiations with creditors to reorganize the terms of their debt payments. Loan restructuring is sometimes imposed upon a company by its creditors if it cannot make its scheduled debt payments. Here are some ways that it can be achieved:
• Debt for Equity Swap: Creditors may agree to forgo a certain amount of outstanding debt in exchange for equity in the company. This usually happens in the case of companies with a large base of assets and liabilities, where forcing the company into bankruptcy would create little value for the creditors. It is deemed beneficial to let the company continue to operate as a going concern and allow the creditors to be involved in its operations. This can mean that the original shareholder base will have a significantly diluted or diminished stake in the company.
• Bondholder Haircuts: Companies with outstanding bonds can negotiate with its bondholders to offer repayment at a “discounted” level. This can be achieved by reducing or omitting interest or principal payments.
• Informal Debt Repayment Agreements: Companies that are restructuring debt can ask for lenient repayment terms and even ask to be allowed to write off some portions of their debt. This can be done by reaching out to the creditors directly and negotiating new terms of repayment. This is a more affordable method than involving a third-party mediator and can be achieved if both parties involved are keen to reach a feasible agreement.
Loan Restructuring vs. Bankruptcy
Loan restructuring usually involves direct negotiations between a company and its creditors. The restructuring can be initiated by the company or, in some cases, be enforced by its creditors. On the other hand, bankruptcy is essentially a process through which a company that is facing financial difficulty is able to defer payments to creditors through a legally enforced pause. After declaring bankruptcy, the company in question will work with its creditors and the court to come up with a repayment plan. In case the company is not able to honor the terms of the repayment plan, it must liquidate itself in order to repay its creditors. The repayment terms are then decided by the court.
Loan Restructuring vs. Loan Refinancing
Loan restructuring is distinct from Loan refinancing. The former requires debt/loan reduction and an extension to the repayment plan. On the other hand, loan refinancing is merely the replacement of an old debt with a newer debt, usually with slightly different terms, such as a lower interest rate.
How Loan Restructuring Works
Some companies seek to restructure debts when they’re facing bankruptcy. They might have several loans are structured in such a way that some are subordinate in priority to other loans. The senior debt holders would be paid before the lenders of subordinated debts if the company were to go into bankruptcy. Creditors are sometimes willing to alter these and other terms to avoid dealing with a potential bankruptcy or default. The loan restructuring process is typically carried out by reducing the interest rates on loans, by extending the dates when the company’s liabilities are due to be paid, or both. These steps improve the firm’s chances of paying back the obligations. Creditors understand that they would receive even less should the company be forced into bankruptcy and/or liquidation. Restructuring loan can be a win-win for both entities. The business avoids bankruptcy and the lenders typically receive more than what they would through a bankruptcy proceeding. Individuals can restructure their loans in various ways as well, but be sure to check the credentials and reputation of any debt relief service you’re considering with your state’s attorney general or consumer protection agency because not all are reputable.
Types of Loan Restructuring
A loan restructure might also include a debt-for-equity swap. This occurs when creditors agree to cancel a portion or all of their outstanding debts in exchange for equity in the company. The swap is usually a preferred option when the debt and assets in the company are very significant, so forcing it into bankruptcy would not be ideal. The creditors would rather take control of the distressed company as a going concern. A company seeking to restructure its debt might also renegotiate with its bondholders to “take a haircut”—where a portion of the outstanding interest payments would be written off, or a portion of the principal will not be repaid. A company will often issue callable bonds to protect itself from a situation in which interest payments cannot be made. A bond with a callable feature can be redeemed early by the issuer in times of decreasing interest rates. This allows the issuer to readily restructure debt in the future because the existing debt can be replaced with new debt at a lower interest rate.
Other Examples of Loan Restructuring
Individuals facing insolvency can renegotiate terms with creditors and tax authorities. For example, an individual who is unable to keep making payments on a $250,000 subprime mortgage might agree with the lending institution to reduce the mortgage to 75%, or $187,500 (75% x $250,000 = $187,500). In return, the lender might receive 40% of the proceeds of the house sale when it’s sold by the mortgagor. Countries can face default on their sovereign debt, and this has been the case throughout history. In modern times, they sometimes opt to restructure their debt with bondholders. This can mean moving the debt from the private sector to public sector institutions that might be better able to handle the impact of a country default. Sovereign bondholders might also have to “take a haircut” by agreeing to accept a reduced percentage of the debt, perhaps 25% of the full value of the bond. The maturity dates on bonds can also be extended, giving the government issuer more time to secure the funds needed to repay its bondholders. Unfortunately, this type of debt restructuring doesn’t have much in the way international oversight, even when restructuring efforts cross borders. Loan restructuring provides a less expensive alternative to bankruptcy when a company, individual, or country is in financial turmoil. It’s a process through which an entity can receive debt forgiveness and debt rescheduling to avoid foreclosure or liquidation of assets.
Loan Restructuring & Rescheduling
Once a borrower faces difficulty in repaying loans or paying interest, the bank should initially address the problem by trying to verify whether the financed company is viable in the long run. If the company/ project is viable, then rehabilitation is possible by restructuring the credit facilities. In a restructuring exercise, the bank can change the repayment or interest payment schedule to improve the chances of recovery or even make some sacrifices in terms of waiving interest etc.
Similarities And Differences Between Restructuring And Rescheduling Of Loan
Points of Similarities of Rescheduled and Restructured Loans
• Amount of Loan: Principal balance plus sum outstanding.
Points of Distinction Between Rescheduled and Restructured Loans
• Nature: Rescheduling is extension of tenure of facility for payment of Sale Price but Restructuring is redemption of existing facility.
• Arrears/Charges: Rescheduled Amount shall not contain additional charges above the old Sale Price whereas Restructured amount may incorporate arrears, capitalization of penalty, profit charges, i.e. resulting in the amount exceeding the Old Sale Price.
• Contract Applied: In rescheduling, contract is applied as supplementary agreement. On other hand restructuring requires new set of documents.
• Effect on Existing Contract: 1st security documents not terminated and obligation is continuing, security is not discharged in rescheduling but in restructuring 1st security documents terminated and security discharged.
• Application: In rescheduling customer wish to extend tenure of facility at lower monthly installment rate and in restructuring Customer wish to start on a clean slate by terminating 1st security agreements and entering into new security agreements.
Ways to Restructure Mortgage
You can refinance or recast your mortgage. Or you can create your own DIY mortgage restructuring plan. We compare so you can decide. The way your mortgage is structured today doesn’t have to be the way it’s structured tomorrow. What are your goals? To free up funds, reduce your monthly nut, or pay off your loan more quickly?
These three strategies offer something for most everyone.
• Send in extra money to pay down principal.
• Recast your mortgage.
• Refinance your loan.
Other ways to easily do it yourself:
• Make one additional mortgage payment per year at any time.
• Divide your monthly payment by 12, and add that extra amount each month when you pay your mortgage.
Refinance Your Loan
The most common way to restructure your loan is with a mortgage refinance, where you replace your current mortgage with a new one at a lower interest rate. If you took that same $200,000 balance on your 6% mortgage and refinanced into one with a 5% interest rate, you’d reduce your monthly payment from $1,199 to $1,074, saving $125 monthly. Refinancing may be challenging to get approved for in a tight lending environment, where you need stellar credit scores and a steady job history. You’ll also need to pay closing costs, which can run 3% to 6% of the loan amount. These tips are appropriate if you’re current on your mortgage and have extra money. Struggling home owners should consider the government-sponsored Home Affordable Modification Program (HAMP) for mortgage restructuring.
Ways to Get Out of a Personal Loan Default
Defaulting on a personal loan will possibly make you stumble into a spiral of debt. Loan repayment can be an uphill task if you run into scenarios, which makes it difficult to pay the dues on time. You most likely be wondering about the outcome or the consequences when you default at a SBI personal loan repayment. Well, defaulting on a loan will not brand you as a criminal but, it is the thing that you must avoid in order to keep a healthy relationship with the financial institutions and your credit score strong. The banks can restructure the loan based on your loan type. Simply extending the holding period of the loan will benefit you with smaller EMIs and therefore, managing it becomes easier. Although before restructuring the loan, the bank will have to provide the reason of default as per the guidelines issued by RBI. In most cases, the tenure can be extended up to one year and not more. Moreover, foreclosure will be practiced with a mutual aid from the borrower.
Will Defaulting on Personal Loan make you Lose the Ownership of Any Assets?
In most cases, the bank will look for possible solutions that will benefit both the parties if an only if the default made was due to some genuine reasons. Thus, the borrower can retain his/her asset, and on the other hand, the bank will avoid any changes made to its Non-Performing Asset portfolio. In cases like a job loss or an accident, the bank will consider this agreement and check whether you paid your EMIs on time on not. Thus, liquidating monetary assets may not be the first outcome of load repayment default.
Options That Will Favour You When You Default on a Personal Loan
• Rescheduling the Debt: The bank may extend your personal loan tenure if it feels that your financial position is not good and you are having trouble with keeping up with the EMI amount. However, it will lead to higher interest generation, but you will be relieved from your current situation. Furthermore, if you get into to the position where you think you can again pay the old EMI, a genuine negotiation with the bank may allow you to prepay the loan early. This will save you from the high-interest outgo if the bank does not charge you with any penalty.
• Deferring the Payment: In cases where you are likely to be able to increase cash flow that stabilizes your financial situation, the bank may provide you a brief pause of few months, before you can start with repayments again. However, the bank may charge you with a penalty for not making the payment on time.
• One-time Settlement: If your financial situation is such that you desire to repay the personal loan at one-go, the bank may provide you with one-time settlement option. However, a case-to-case approach will be followed in this situation. You would probably have to pay the settlement amount lower than the original amount as the bank may cut-off some additional charges. In case your financial condition is critical, you may require filing for bankruptcy to relieve yourself from further loan commitments.
• Conversion of Unsecured Personal Loan to Secured Loan: In the case of unsecured loans, the banks act stricter, therefore; you can convert your unsecured loan into secured loan by offering a security. This way your EMI, as well as interest rate outgo, will be lessened. Whatever happens, you have to remember that your intent to repay the loan looks genuine to the lender and the moment you realize that you will not be able to meet the obligations set by the lender for personal loan repayment, act wisely and talk to the lender about it.
What Happens When None of the Above-mentioned Options Work?
In this case, the bank will march to the next step of repossession of assets.
Movable Assets (vehicles):
• The notice period of 7-15 days will be given to you by the bank to repay all the remaining dues and if not, the lender will recover it back from your vehicle.
• After the recovery, the bank will again provide you a seven-day pre-sale notice period to pay the outstanding dues. The pre-sale notice will possess all the details of contact person and the concerned office from where you can repay the dues and release the vehicle.
• If you tend to pay the dues with agreed terms of settlement, the bank will release you back the vehicle within one week after the payment.
• And if you failed to make the payment, your vehicle will be sold via auction within three months after the repossession.
Immovable Assets (property/land/house):
• You will get a notice from the bank. However, as per the guidelines set by RBI, this agreement is only applicable if the personal loan gets classified as NPA.
• You will be given a two-month period to either settle the loan or regularize the account.
• If you fail or refuse to pay, then the bank will provide you the ‘demand possession’ notice asking for the physical possession of your mortgaged property.
• After the repossession, you will be given a one-month period to settle the personal loan. After which, your property will be sold off by the bank via auction. The bank will send you the details about the auction referring to the date, time and venue.
• If you clear the dues in full, the bank might consider giving your property back to you after repossession and before processing the auction.
• In case, your property fetches more than your loan, the bank is liable to refund the remaining amount to you after adjusting the dues.
So, if you have defaulted at personal loan repayment, do not panic. The above-mentioned pointers will help you deal with repayments in a comfortable manner. You can also take a soft loan from your friends and family members and pay off the immediate dues.
Free Initial Consultation with Lawyer
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