What is Debt Reorganization Versus Restructuring?

When a business or an individual is struggling with debt in South Florida, the possibility of debt reorganization or debt restructuring can often be a promising solution to financial difficulties. Yet it is extremely important to be clear about distinctions between debt reorganization in a bankruptcy case and different forms of debt restructuring that might be available. For any business that is considering a Chapter 11 or Subchapter V bankruptcy, or for any individual considering a Chapter 13 bankruptcy filing, it is essential to learn more about debt reorganization and how it works in a bankruptcy case, compared with debt restructuring options that debtors also may be considering.

Debt Reorganization in Bankruptcy Cases 

In various types of business and individual bankruptcy cases, debtors have the opportunity to reorganize debt. What is debt reorganization? It involves an agreement between the debtor and the creditor to change the terms that have already been established for the debtor to repay the debt. This term is used routinely in Chapter 11, Subchapter V, Chapter 13, and other types of reorganization bankruptcy cases as a form of debt relief where the debtor agrees to make monthly payments over a period of time (that time period will vary depending on the type of bankruptcy). For individuals, at the end of a repayment period, certain remaining debts may be discharged.

With debt reorganization in a bankruptcy case, the monthly payment owed, and the terms of the repayment plan, will depend on a range of factors including the amount of secured and unsecured priority debt, and for individuals, the value of available exemptions.

How Does Debt Restructuring Differ? 

Debt reorganization in a bankruptcy case really is, in practice, a form of debt restructuring, but the semantics are important since the term “debt restructuring” is typically used to refer to specific types of debt relief outside a bankruptcy case.

There are a number of different types of debt restructuring that can be available to businesses and individuals. According to The Balance, common forms of debt relief that are described as debt restructuring include but are not limited to:

• Loan modification, which involves an agreement between the debtor and the creditor to change the terms of the existing loan, which can mean a change in the monthly payment amount, length of the loan, or interest rate;
• Forbearance agreement, where the creditor agrees to hold off on receiving loan payments for a period of time;
• Debt settlement, which involves a negotiation between a creditor and a debtor for the creditor to accept less money than what the debtor currently owes on the loan, and the creditor agrees to write off remaining debt (but the debtor should keep in mind that this written-off debt is taxable); and
• Debt-for-equity swap, which is a form of debt restructuring available to certain businesses where a creditor agrees to forgive some of the business’s debt in exchange for becoming a stakeholder in the business.

Contact a West Palm Beach Bankruptcy Attorney Today 

Any business or individual with questions about filing for bankruptcy should seek advice today from one of the experienced West Palm Beach bankruptcy lawyers at Kelley, Fulton, Kaplan & Eller. We have years of experience representing corporate clients and individual debtors in business bankruptcy cases, and we can answer any questions you have. Contact us to learn more about how we can assist you.

Sources:

uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics

thebalancemoney.com/what-is-debt-restructuring-6753776

law.cornell.edu/uscode/text/11