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Common types of debt restructuring for individuals

More than likely, you would end up restructuring your debt according to one of these methods:

1. Loan modification

Loan modification involves working directly with your lender to change the original terms of your loan. This could include:

• Extending the loan term to reduce monthly payments.
• Reducing the interest rate to make payments more affordable.
• Converting a variable interest rate to a fixed rate for more predictability.
• Adding missed payments to the end of the loan (forbearance).
• Temporarily suspending payments during financial hardship (deferment).

Mortgage modifications became particularly common after the 2008 housing crisis, with programs like the Home Affordable Modification Program (HAMP) helping homeowners avoid foreclosure.

2. Debt consolidation

Debt consolidation involves combining multiple debts into a single loan with a lower interest rate and/or better terms. This simplifies repayment and often reduces total monthly payments. Common approaches include:

• Personal consolidation loans from banks or credit unions.
• Balance transfer credit cards with promotional 0% interest periods.
• Home equity loans or lines of credit that use your home as collateral.
• 401(k) loans that borrow against retirement savings (though this carries significant risks).

For example, someone with multiple credit cards charging 18-25% interest might consolidate into a personal loan at 8-12%, significantly reducing interest costs and creating a clear payoff timeline.

3. Debt settlement

Debt settlement involves negotiating with creditors to accept less than the full amount owed as complete payment. This option typically:

• Is considered for debts already in collections or significantly delinquent.
• Results in immediate damage to credit scores.
• May have tax implications (forgiven debt over $600 may be taxable as income).
• Can be arranged directly or through a debt settlement company.

4. Credit counseling and debt management plans

Credit counseling agencies (typically non-profits) can help create debt management plans (DMPs) that:

• Consolidate multiple payments into one monthly payment.
• Often secure lower interest rates from creditors.
• Provide educational resources and budgeting assistance.
• Usually require closing credit accounts included in the plan.
• Typically take 3-5 years to complete.

Organizations like the National Foundation for Credit Counseling can connect individuals with certified counselors who work with creditors on your behalf.

5. Bankruptcy (as a last resort)

While technically a form of debt restructuring, bankruptcy represents a legal process that should be considered only after exhausting other options:

• Chapter 7 bankruptcy liquidates assets to discharge debts.
• Chapter 13 bankruptcy creates a court-supervised repayment plan.

Bankruptcy provides significant protections through the automatic stay on collections but remains on credit reports for 7-10 years and can impact employment and housing opportunities.

The overall process of restructuring

Should you decide to restructure your debt, these are the basic steps involved:

Step 1: Assess your financial situation

• List all debts with balances, interest rates, and monthly payments.
• Calculate your debt-to-income ratio.
• Review your credit reports and scores.
• Determine how much you can realistically afford to pay each month.

Step 2: Research available options

• Investigate which restructuring methods best suit your specific debts.
• Understand the requirements and consequences of each approach.
• Consider consulting with a financial advisor or credit counselor.

Step 3: Contact your creditors

• Explain your situation honestly.
• Ask about hardship programs or modification options.
• Get any agreements in writing before making payments under new terms.
• Be persistent but polite—you may need to speak with multiple representatives.

Step 4: Execute your plan

• Follow through on all requirements of your restructuring agreement.
• Document all communications and payments.
• Avoid taking on new debt during this process.
• Build an emergency fund to prevent future financial crises.

Pros and cons of restructuring

The best way to make an informed decision:

Advantages

• Immediate relief from unsustainable payment obligations.
• Lower monthly payments making budgeting more manageable.
• Reduced interest costs over the life of the debt.
• Avoidance of more severe consequences like bankruptcy.
• Potential to improve credit long-term by preventing defaults.

Disadvantages

• Potential credit score impact (though usually less severe than default).
• Extended repayment periods in many cases.
• Possible tax implications for forgiven debt.
• Fees associated with some restructuring options.
• Restricted access to new credit during the restructuring process.

Special considerations for different types of debt

Not all debts are treated the same:

Student loans

• Federal student loans offer income-driven repayment plans, deferment, and forgiveness programs.
• Private student loans have fewer hardship options but may still offer modification programs.
• Student loan refinancing can lower rates but may sacrifice federal protections.

Mortgages

• Homeowners may qualify for loan modifications, forbearance, or refinancing.
• Government programs often exist during economic downturns.
• Options like reverse mortgages exist for qualifying seniors.

Medical debt

• Many healthcare providers offer interest-free payment plans.
• Hospital charity care programs may reduce or eliminate bills for qualifying patients.
• Medical debt collectors are often more willing to negotiate settlements.

Credit card debt

• Hardship programs can temporarily reduce interest rates and payments.
• Balance transfer offers provide interest relief periods.
• Credit card companies may have internal “workout” departments for struggling customers.

How debt restructuring affects your credit

The impact of debt restructuring on credit scores varies significantly depending on the approach:

• Loan modifications typically have minimal impact if payments remain current.
• Credit counseling programs may be noted on credit reports but generally don’t significantly impact scores.
• Debt settlement typically causes a substantial drop in credit scores due to the “settled” status.
• Debt consolidation may cause a temporary dip from credit inquiries but often improves scores long-term.

Most negative credit impacts from restructuring improve over time as you build a positive payment history under the new arrangement.

The bottom line

Debt restructuring represents a critical financial tool that can provide relief and a fresh start for individuals struggling with debt obligations. By understanding the available options, carefully evaluating your situation, and taking proactive steps to address financial challenges, you can create a more sustainable path forward.

There’s always JG Wentworth…

If you have $10,000 or more in unsecured debt there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include: 

• One monthly program payment 
• We negotiate on your behalf 
• Average debt resolution in as little as 48-60 months 
• We only get paid when we settle your debt  

If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?