How to restructure debt

Issues discussed in the material:

• What problems is the debt restructuring procedure designed to solve?
• How can debt restructuring be carried out?
• What are the maximum terms for debt restructuring?
• How the schedule and deadlines for debt restructuring are set
• Does the statute of limitations affect the debt restructuring procedure?

Many organizations and individual entrepreneurs face financial difficulties while developing their business. Lack of profit or insufficient amount of it leads to the fact that the company cannot make payments on existing loans on time. As a result, the debt becomes larger and larger, and this is equally disadvantageous for both the lender and the borrower. We’ll talk about what timeframes for debt restructuring a borrower can expect in our article.

How effective is the debt restructuring process?

In order to begin the restructuring process, an additional agreement must be drawn up between the creditor and the debtor.

The credit company that provided the borrower with financial resources, at its discretion, can change the terms of the previously concluded agreement and reduce the amount of debt by means of: waiver of interest payments, reduction of the interest rate, deferment of payment or extension of the term of the loan agreement.

It is worth noting that each specific case has its own method of debt restructuring, but its choice, as well as its effectiveness, depend, first of all, on the creditor. Based on what factors does a financial organization decide on a possible debt restructuring and determine the timing and stages of its implementation? The lender's attention is drawn to the following points: the state of accounts and cash flows on them, the presence of sources of additional income, as well as a general analysis of information about the status of the borrower.

Methods and types of debt restructuring

As we noted above, there are several ways to restructure financial debts, so before starting this procedure, the lender and the borrower must agree on choosing the most effective one. Since the restructuring scheme also depends on the specific type of debt obligation, we propose to dwell in more detail on each of its methods.

Prolongation.

This is the most common type of financial debt restructuring, which involves increasing the loan term and reducing monthly payments. But, prolongation usually implies an increase in the total loan amount due to the accrual of additional interest.

Let's look at the mechanism of its action using a specific example.

Let’s say an organization received a loan from a bank in the amount of 5 million rubles for a period of 18 months at 20% per annum.

In accordance with the initial terms of the loan, the overpayment on this loan will be approximately 792 thousand rubles (subject to differentiated payments).

Now imagine that unexpected difficulties in business development led to the fact that the company had to ask the bank to restructure the debt by prolonging it immediately after receiving the loan payment. The lender made concessions and increased the loan term exactly twice, i.e. to 36 months.

Through a series of calculations, we obtain a new amount of overpayment on the loan taken out, which will amount to 1.53 million rubles.

Thus, with the increase in the debt repayment period, the total amount of overpayment increased significantly.

Reducing the interest on the loan.

This type of debt restructuring is the most desirable for the borrower, but banks do not often offer such conditions to their debtors. Reducing the loan term is possible only if there is high loyalty on the part of the bank and an ideal credit history of the borrower.

Change of payment schedule.

This method of debt restructuring is especially relevant for those borrowers whose business is associated with seasonal fluctuations in demand for the product produced or services provided. In this case, the bank can change the payment schedule taking into account the characteristics of the debtor’s income generation.

Credit holidays

– a fairly popular type of credit debt restructuring. Credit holidays can represent a deferment of payment only on the principal debt, i.e. the borrower continues to pay interest monthly according to the established schedule, and the payment of the principal debt is postponed by the bank for a certain period.

In addition, credit holidays can be provided by the bank in relation to all loan payments, including interest. Please note that credit holidays also have their disadvantages: when their term ends, the payment amount will increase, since the borrower will have to catch up with the debt repayment schedule. In addition, due to the accrual of additional interest, the total overpayment on the loan will increase.

Changing the loan currency.

Another method of restructuring credit debt, which is used in cases where, after the loan was issued to the borrower, there was a rapid change in the exchange rate (for example, devaluation).

Refinancing.

This method is considered the most favorable for the borrower. Its essence is to provide the debtor with a new credit loan on more favorable terms, while part of the amount received is automatically used to fully repay the debt under the previous obligation. Plus, when refinancing, banks often cancel the borrower’s debts for accumulated penalties.

In addition to the above, in the banking sector there are other ways to restructure the financial debt of individual entrepreneurs and legal entities. Among these methods, the bank can choose the most suitable one, depending on the financial solvency of a particular client:

Main methods of debt restructuring

Various restructuring measures may be used for companies. The most effective and common are:

• Novation. It is represented by the replacement of an existing contract with a new agreement between both parties, according to which the validity of the first document is terminated. For example, instead of cash, a debt can be paid in works or goods. In this case, the agreement clearly states what services or goods will be provided, what their value is, and what other characteristics they have. In this case, the loan and the borrower do not change.
• Cession. This method of debt restructuring involves the transfer of the right of claim by the creditor to another entity. In this case, permission for this process from the debtor is not required. But it is required to notify him in writing so that he does not appeal to the court to challenge the process.
• Pass. This restructuring method is used if there are mutual obligations between two organizations. Therefore, they are simultaneously lenders and borrowers to each other. Offset is carried out by drawing up a special application, but the condition for its implementation is a counterclaim and the homogeneity of the items. Certain situations are taken into account in which offset is not allowed, for example, when paying for shares or contributing money to the authorized capital of a company.
• Transfer of debt.
  In this case, the debtor company transfers the debt to another organization. This process requires consent from creditors. Approval may be preliminary or subsequent. The preliminary one is prescribed in the loan agreement itself, which indicates the possibility of transfer of the obligation by the debtor. The following must be obtained from the lender before the actual process.
• Providing deferred payment. This period cannot exceed 5 years. Lenders rarely agree to this option as they will end up losing income as the money loses its value over such a long period of time. But often a reprieve is given for a short period of time.
• Securitization. This process involves the conversion of debt into securities. This is considered optimal when there are multiple creditors. Promissory notes, shares or bonds can be issued. This method of restructuring has many advantages, since the issued securities are liquid, so creditors can sell them on the market and receive their funds back. Often, debtor companies provide bonds or bills with collateral, which can be valuable property, guarantees or sureties.
• Current account agreement. This type of restructuring assumes that participants choose a single account into which claims are entered. This results in the debtor being obligated to pay the difference to the creditor upon closing the account.

Restructuring goals.

Thus, different types of debt restructuring can be used for firms. Each of them has its own characteristics and requirements, so it is important to make sure that it is possible to perform this or that action legally.

What to do if the commission refuses to restructure

Restructuring can only be carried out with the approval of the territorial commission. If she refuses to sign a restructuring agreement, this is usually due to the following reasons:

• untimely provision of the agreement;
• the conditions or requirements of the process are not met;
• the agreement does not contain the required number of creditors;
• a case has been initiated against the debtor, according to which he is declared bankrupt.

Important! If the commission makes a positive decision, then on the day the agreement is signed, the accrual of penalties and fines on all debt obligations of the debtor stops.

Next, only a month is given to draw up an additional agreement related to the restructuring of the debt resulting from accrued interest and penalties.

This video will tell you whether restructuring is worth it:

Establishing conditions and terms for debt restructuring: step-by-step instructions

Both the bank and the borrower company can take the initiative to restructure the loan debt. Financial experts recommend that insolvent organizations be the first to initiate a restructuring procedure, without waiting for failure to repay debts, accrual of fines and penalties.

Now let's move on to consider step-by-step instructions for restructuring debt obligations.

Step 1: Meet with creditors.

The first stage is an objective analysis of the financial condition of your organization. You must honestly answer the question: does the company have a sufficient amount of material resources to make timely payments on all debt obligations. If the answer is no, you must initiate a meeting of all creditors of your organization.

At the meeting, you should talk about the current state of affairs, describe an approximate strategy for improving the financial situation and proceed to a joint discussion of further interaction with creditors. It is not recommended to postpone such a meeting, since after the organization violates the deadlines for making regular payments, the attitude of creditors towards the borrower will significantly worsen. Your task is to show your readiness to cooperate, demonstrate confidence in the future and the possibility of a quick way out of a difficult situation.

Please note that starting negotiations separately with each creditor at the first stage is not a good idea. So, you are unlikely to be able to quickly reach an agreement on debt restructuring, because each creditor will have its own vision of the current situation, its own requirements, and, most likely, a lack of trust in other credit institutions.

At the first meeting, creditors will want to hear information about the total amount of debt, the capital available to the borrower, as well as approximate provisions of the anti-crisis strategy and information about the prospects for business development. However, even if you cannot provide complete information on the above points, this is not a reason to delay the start of interaction with creditors regarding restructuring and violate debt repayment deadlines.

If during the meeting you are asked questions to which you cannot immediately give an accurate and detailed answer, you can always set a time frame during which the company will provide creditors with all the information they are interested in.

In the process of communicating with creditors, you must not only inform them about the current state of affairs at the enterprise, but also determine the time frame after which the company will be able to resume payments on existing loans.

Step 2. Get a moratorium on loan repayments.

At a meeting with creditors regarding the restructuring of your debt, you will need to not only discuss the important nuances outlined in the description of the previous stage, but also agree on a moratorium on debt payments. This definition refers to the period during which the organization will not be able to meet its loan obligations. A moratorium on debt payments will allow you to get a reprieve in order to develop an anti-crisis action plan and begin to implement it.

You can argue your request for a moratorium by saying that the company needs time to agree on loan restructuring by writing a corresponding statement. The standard moratorium period on debt payment is approximately three months, with the possibility of extension by mutual agreement of the parties. A shorter period of time is often not enough, and a longer moratorium period is quite difficult to negotiate with the bank. But please note that after signing the moratorium agreement, restrictions on certain actions will be imposed on the debtor company. Thus, an organization may be prohibited from:

• pay dividends;
• increase the total amount of debt by attracting new loans and credits;
• issue guarantees and warranties;
• sell or pledge assets without the approval of creditors.

If your organization has several lenders, it will be better if they create a coordination committee, which will include several representatives of the largest credit companies. Members of the coordination committee, for additional remuneration (its amount depends on the amount of debt and the complexity of the current situation), will conduct further negotiations on debt restructuring, analyze the correctness of all information provided by the debtor, and also take part in the development and approval of the necessary financial documents.

If the debtor company is a fairly large organization, negotiations with creditors on debt restructuring may last more than one year.

Step 3. Determine the stages of corporate loan restructuring and the work to be done.

Restructuring the debt of an individual entrepreneur or organization is accompanied not only by financial losses, but also by the expenditure of time and management resources. The last nuance is often underestimated by the borrower, which causes an increase in the terms of negotiations regarding restructuring or even leads to failure of the procedure.

From practice it follows that negotiations with a bank regarding debt restructuring are a fairly long process, especially if the borrowing company is the owner of a large business and large-scale debts. That is why it is necessary to carefully prepare for interaction with a credit institution from the very beginning and appoint a competent and responsible employee (several at once) for these purposes.

In medium-sized organizations, responsibilities for interaction with the bank are usually assigned to the CFO. In large companies, the contact person most often becomes one of the deputy managers responsible for attracting financing, for example, the head of the treasury department.

The contact specialist must interact with all creditors, coordinate the activities of various services and consultants of the enterprise, have sufficient authority to make operational decisions, and also regularly report to the company’s management about the progress of negotiations, results achieved and emerging problems.

At this stage, a general algorithm for the restructuring procedure should be determined and a list of upcoming work should be drawn up. It is very important to make as accurate calculations as possible regarding the amounts that the organization will need to spend on the cost items associated with the restructuring. For large businesses, these amounts can be in the hundreds of thousands of dollars. Please note that members of the creditor coordination committee, external consultants, external lawyers, etc. will require payment for their work.

Do not forget about developing a financial model indicating the planned profit and possible losses for a period of at least five years (preferably on a quarterly basis), since most lenders want to see exactly this type of forecast.

What are the maximum terms for debt restructuring?

In cases where debt restructuring is carried out as part of a citizen’s bankruptcy, its maximum period should not exceed 3 years (if the plan was approved by a meeting of creditors).

If the plan as part of the bankruptcy procedure was approved by the court, the debt restructuring period should be limited to two years. During this period, the citizen will have to fulfill all debt obligations.

Other terms are provided for by debt restructuring by agreement of the parties. In this case, the period for debt restructuring will depend on what agreements the debtor and creditor reached as a result of negotiations.

The period can vary from several months to several years, because this issue is not limited by law.

But it is unlikely that the creditor will make such concessions and agree to extend the restructuring period by ten years. As a rule, banks prefer to resolve the issue of full repayment of debt within one to three years.

Definition and legal framework of debt restructuring

Debt restructuring means changing the terms of the loan in a direction more favorable to the borrower. Reducing the financial burden on the debtor is expressed in reducing the interest rate on the loan, increasing the term of the contract, redistributing payments to repay the debt or providing credit holidays.

As a rule, in such a situation we are talking about the relationship between the bank and its client, which can be either an individual or a legal entity. The term is especially often used in relation to the debts of citizens.

The possibility of restructuring the debts of individuals within the framework of bankruptcy proceedings was enshrined in legal practice after the adoption of No. 154-FZ, approved on June 29, 2015. This Federal Law contains amendments to another legal act - No. 127-FZ, signed by the Head of State on October 26, 2002 and regulating the procedure for declaring financially insolvent both private and legal entities. The main requirement for the restructuring procedure, contained in the current version of federal legislation, is the repayment of debt within a period that does not exceed 3 years. All other nuances of the financial transaction are determined by the interested parties.

It is important to note that debt restructuring is widely used not only during bankruptcy proceedings, but also in everyday relationships between banks and clients. In the first case, the arbitration manager acts as an intermediary between the creditor and the debtor, and the main decisions are made or approved by the judge.

The second situation occurs in practice much more often and involves the participation of two parties - the bank itself and the borrower, the relationship of which is regulated by the loan agreement concluded between them. It is voluntary, and the main decisions are made by responsible employees of the financial organization.