Restructuring AgreementCredit Repair Definition
A formal agreement between a debtor and creditors to modify the terms of existing debts, often to avoid bankruptcy.
Definition
A restructuring agreement is a formal contract negotiated between a financially distressed debtor (individual or company) and its creditors to alter the terms of the debtor's existing debt obligations. The goal is typically to make the debt more manageable for the debtor, allowing them to continue operations or avoid formal insolvency proceedings like bankruptcy, while providing creditors with a better recovery than they might receive in liquidation. Restructuring can involve various modifications, such as extending repayment periods, reducing interest rates, converting debt to equity (in corporate restructurings), temporarily deferring payments, or sometimes reducing the principal amount owed. These agreements require the consent of the involved creditors and are often complex, especially in corporate workouts.
Frequently Asked Questions
Why would creditors agree to a restructuring?
Creditors may agree if they believe the restructuring offers a better chance of recovering more of their debt compared to forcing the debtor into bankruptcy or liquidation, where recovery might be minimal. It can also preserve ongoing business relationships.
Is restructuring the same as bankruptcy reorganization (Chapter 11)?
No. Restructuring often refers to an 'out-of-court' workout negotiated directly between the debtor and creditors without formal court supervision. Chapter 11 bankruptcy is a formal, court-supervised reorganization process under the Bankruptcy Code, which provides certain legal tools and protections (like the automatic stay) not available in out-of-court restructurings.
What types of debt terms can be changed in a restructuring?
Common modifications include: extending the loan maturity date, reducing the interest rate, changing payment schedules (e.g., interest-only periods), waiving existing defaults, converting debt into company stock (equity), or sometimes forgiving a portion of the principal.
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