Debt restructuring defined
Debt restructuring involves the renegotiation of existing debt with your creditors to create new, more manageable terms.
Instead of taking out new debt or falling deeper into collections, you work with your creditors to restructure your existing loan or other debt. This may include lowering the interest rate, adjusting the term to give you more time to pay off your debt or decreasing the total amount due.
It is a solution that can help make your debt more manageable without leading to foreclosure or bankruptcy. By continuing to make payments, your creditor can recoup some of the debt, and you can avoid more severe damage to your credit score.
The goal of consumer debt restructuring is to reorganize your debt so it will have better terms that will make it easier for you to pay off.”
“Debt restructuring retains the original debt until it has been eliminated; just the terms change,” explained consumer finance and debt expert Sean Fox, President of Debt Relief at Achieve, a digital personal finance company. “The goal of consumer debt restructuing is to reorganize your debt so it will have better terms that will make it easier for you to pay off.”
When to use debt restructuring
There are certain times when debt restructuring may make sense.
- You can no longer make your monthly payments due to changes in income or emergency expenses.
- You have too many high-interest debts.
- You are experiencing a temporary financial hardship that’s affecting your ability to meet payment schedules.
- You want to avoid bankruptcy.
“The biggest benefit of restructuring debt is the improved cash flow,” said Ruth White, EA, MBA, and co-founder of White Sands Tax Services. “In many cases, the borrower can also end up paying significantly less over the term of the debt. Successful restructuring could … help the borrower avoid default, litigation, bankruptcy or foreclosure.”
If you anticipate financial difficulty or can’t afford your loan payments, it is important to act as soon as possible to give yourself the best chance of resolution. Acting quickly will also help minimize the damage to your credit and get you out of debt sooner.
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How debt restructuring works
When you are drowning in debt, there are a few steps to take so you can restructure your existing liabilities.
- Evaluate your finances: First, check your credit score. Then, create a list of your debts. Include all balances and monthly payments. Note interest rates so you can identify your high-interest debts.
- Calculate your debt-to-income ratio: By calculating your debt-to-income (DTI) ratio, you can better determine how much you can afford in monthly payments on top of your existing obligations.
- Explore alternatives: Review different debt restructuring options to see which method works best for you. Ensure you can meet the terms before proposing them to your lender.
- Consult a professional: A financial advisor can help model different debt repayment scenarios so you can find the right restructuring method for your needs. They may be able to recommend hardship programs, government assistance or debt relief companies that can help you get back on track.
- Confirm in writing: Ensure that your creditor puts all loan modifications and agreements in writing before proceeding with payments under the new terms. Keep copies of all communications and payments.
- Follow through: Commit to the requirements of your restructuring agreement and make your payments in full and on time.
CONSUMERAFFAIRS TAX TIP
Keep in mind that even if you do restructure debt, the IRS considers any forgiven debt over $600 taxable income.
Debt restructuring options and types
Filing for bankruptcy is not your only option if you have too much debt. Debt restructuring may take several forms, including:
Loan modification
Your creditor may adjust the terms of your loan, such as changing the interest rate or extending the term. A loan modification may change how much you pay each month without refinancing.
Loan repayment agreement
Your creditor may adjust your loan agreement so you owe less than the original balance, making repayment much easier. Keep in mind that if you sign a new loan agreement to replace the old one, it is legally binding.
Debt settlement
Similar to a loan repayment agreement, your creditor may agree to lower your total balance through a debt settlement. However, this is typically paid in a lump sum. A debt relief company or debt attorney can help you negotiate for a more favorable settlement.
Forbearance
Mortgage forbearance allows you to add missed payments to the end of your loan. Your lender will pause or lower your payments, but this is only a short-term reprieve to address a temporary hardship.
Deferment
Similar to forbearance, loan deferment temporarily pauses payments for specific cases, such as military service, reenrollment in school, cancer treatment or economic hardship. This is commonly seen with student loans.
Debt consolidation
You can consolidate your debt by combining multiple debts into a single loan with a potentially lower interest rate or more favorable terms.
Debt management plan
You can work with a credit counseling agency to create a debt management plan. This can help in several ways, from consolidating your debt to lowering your interest rate. You can also benefit from the credit counseling and educational resources offered.
Bankruptcy
Bankruptcy should be a last resort, as the statute of limitations on debt can last up to 10 years. If you must file for bankruptcy, be sure to carefully review the risks and consult a bankruptcy attorney for guidance on navigating the process.
The debt restructuring options available to you will ultimately depend on your creditor. Get in touch with your creditor as soon as possible to inquire about options and take next steps.
Debt restructuring by loan type
Your options for debt restructuring depend on the type of loan you have.
| Type of loan | Debt restructuring options |
|---|---|
| Credit card debt | Consolidation, balance transfer, loan modification, hardship programs |
| Mortgage debt | Loan modifications, refinancing, reverse mortgages, government programs, forbearance |
| Student loan debt | Income-driven repayment plans, forgiveness programs, refinancing, deferment |
| Medical debt | Interest-free payment plans, hospital charity care programs |
Pros and cons of debt restructuring
Debt restructuring can be a temporary fix to resolve financial hardships, but it is not without risk.
| Pros | Cons | |
|---|---|---|
| Credit impact | May help improve credit score long-term | May affect credit score short-term |
| Cost impact | May lower monthly or overall costs | Added loan fees and interest may apply |
| Payment impact | More affordable payments or favorable terms | May take longer to pay off due to added interest and tax |
| Creditor impact | Improves creditor relationship for future benefit | Approval not guaranteed |
| Debt settlement impact | Can reduce debt faster | May stay on your credit report for up to seven years |
“Remember, a lower monthly payment is not automatically a better deal overall,” warned White. “Addressing the borrower's actual underlying problem is key, and the borrower needs to ensure they aren't just postponing the next default.”
Debt restructuring is not without its disadvantages, but it may be right for you, depending on your financial situation. Consider working with a financial advisor or debt counselor who can advise you on the right path forward given your total debt.
» EXPLORE FURTHER: Debt restructuring pros and cons
FAQ
What are the three types of debt restructuring?
The three main types of debt restructuring include loan modification, loan repayment agreement and debt settlement.
What are the disadvantages of debt restructuring?
Debt restructuring may not lower or eliminate your debt. In fact, it may cost more due to additional fees and high interest rates. It may also negatively affect your credit score, even if only temporarily.
Does debt restructuring hurt your credit?
Debt restructuring may hurt your credit, depending on the strategy you use. Debt settlement and consolidation can temporarily affect your credit score, while bankruptcy can have a lasting impact.
“The process can leave a significant mark on credit reports,” Fox explained. “Although we see that credit profiles rebound (often much better than ever) once the consumer has settled their debt and can go on to moving their financial lives forward.”
How is debt restructuring different from debt consolidation?
Debt restructuring involves reorganizing existing debt, while debt consolidation combines all debts into a single loan.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Consumer Financial Protection Bureau, "What Is a Repayment Plan on a Mortgage?" Accessed July 21, 2026.
- Federal Student Aid, U.S. Department of Education, "Student Loan Deferment." Accessed July 21, 2026.
- National Foundation for Credit Counseling, "What Is a Debt Management Plan?" Accessed July 21, 2026.
- Administrative Office of the United States Courts, "Bankruptcy." Accessed July 21, 2026.
