The Reorganization of Debt

Debt Reorganization

The reorganization of debt involves providing some form of financial relief for a debtor. Debt reorganization may involve redoing the terms of an original debt agreement or liquidating a debtor's assets as a way to relinquish him from an existing debt obligation. When done through the court system, legal examples of debt reorganization include Chapter 7 and Chapter 13 bankruptcy. A Chapter 7 bankruptcy requires debtors to liquidate certain property assets in exchange for the relinquishment of debt. A Chapter 13 bankruptcy restructures financial obligations and requires debtors to pay down the debt within a stated period according to a repayment plan.

The option to carry out a debt reorganization depends on the type of lender involved and the ability of the debtor to make good on the debt owed. Some lenders may allow for more flexibility and be open to restructuring a person's financial obligation, while others may require prompt payment by whatever means possible, so different situations may call for different approaches to debt reorganization. In some cases, reorganization may take the form of a co-signer or a third party who assumes the debtor's obligations. Debt reorganization can also involve lengthening the terms of an existing agreement, which gives a debtor more time to pay it off.

Debt restructuring arrangements between lenders and debtors proceed under the assumption that the original terms of the existing debt are replaced by the terms and conditions stated in the new arrangement. These assumptions are made especially clear when a person files for Chapter 13 bankruptcy and the court assumes responsibility for drawing up a new arrangement. Restructuring existing debts may involve adjusting grace periods for scheduled payments, adjusting interest rate charges on the debt that remains and drafting a payment plan that incorporates the new terms and conditions.

Debt reorganization approaches can vary in terms of whether an existing agreement is restructured or the entire amount owed is reworked so the debtor can afford to pay it off. An example of this would be a debt buyback agreement, which requires the lender to agree to a reduced debt amount provided the debtor pays it off ahead of time. In effect, the debtor receives a discount or reduction of debt owed in exchange for paying it off early. A debt conversion approach is another way of reworking a total debt amount rather than restructuring an existing agreement. An example of a debt conversion would be a debt-for-equity swap, which involves the debtor replacing an existing debt with something of equal value, such as stocks or bond accounts.