Debt restructuring is the process by which a significant portion, usually 60-80% is extinguished while the remainder gets paid off over a period of up to 5 years interest-free.
It is principally a method to avoid bankruptcy. Creditors like it because they get something in return on what they have lent out. In comparison, a bankrupt debtor is always worth much less, in some cases nothing to creditors.
Although restructuring debt does carry some costs, most notably a hit to your credit rating, it is a very effective way to get a fresh start if it includes a solid financial rehabilitation component.
The burden of paying an amount each month to service out of control debt is terribly high. It represents payments for past mistakes which deprive an individual from living, even modestly in the present. More importantly it acts as significant hindrance to saving for retirement or a down payment on a house.
Some of the characteristics are:
You have up to five years to pay it back interest-free. There is no penalty to pay it back early. In fact, it is in your interest to pay it back as soon as possible because it remains on your record as an R7 for three years past your last payment. So for instance if you pay it off in three years it would remain there for those three years plus an additional 3 years.
Debt restructuring does not mean paying all that you owe back. While it may seem altruistic to pay back all that you owe, the problem is that despite the best intentions this course often results in failure because the monthly burden is too high. The most important course of action is to get you a fresh start. But dealing with the debt must not be done in isolation, the restructuring plan needs to include a comprehensive credit rebuilding program otherwise you will be left vulnerable for future financial failure and excluded from mainstream banking/lending products due to poor credit.
Debt restructuring does not mean giving up responsibility to settle debts with your creditors. Simply ignoring your debt problem will not result in absolving your responsibility. Not paying your debts will result in creditors passing your debt to a collection agency, getting a judgment against you and even having your salary or pension subject to garnishment or liens placed against assets. A debt restructuring plan means setting up a contract that becomes binding between you and your creditors where you commit to pay a portion of it back.
It does not mean a quick fix for getting out of indebted situation. It requires a commitment to complete the proposal in terms set out at the beginning. Once you make a proposal to your creditors and they agree to the terms, you are required to fulfill your end of the agreement by making continuous payments for up to five years. Falling behind by three payments will result in an annulment of your contract and you will be back with your debt again.
Debt restructuring does not mean facing a burden for your whole life. Once your proposal has been successfully completed three years later it is removed from your credit record, permanently.
Debt restructuring will not allow you to access credit again immediately. You have to prove to creditors that you can manage credit responsibly. A really nice feature of doing a consumer proposal as part of the restructuring plan is that you can begin the process of rebuilding your credit soon after getting it filed. You do not have to wait until it is completed.
After confirming everything is reporting correctly after the proposal is accepted you can go out and get a secured credit card as the first step to begin the process of rebuilding your credit. This is accomplished by putting a down payment on a credit card, using it and then pay off the monthly balance completely. With this it is essential that you never go over 75% of the limit. It is best if you can keep it below 50%. This starts getting positive items reporting on your credit report and showing responsible use of credit, this is just one tool that is part of your overall credit rebuilding plan which will take approx. 18 months and helped if you can pay of the proposal sooner.
As you can see a comprehensive debt restructuring plan is more than just dealing with the debt and in when combined with a credit rebuilding program is a really effective means to get out from a life filled with excessive debt, burdensome monthly payments and poor credit. For many, It is really the only effective method to getting a complete fresh start.
About the Author:
Laurence Herzenberg operates the Newmarket, Ontario 4 Pillars Consulting debt restructuring office. He has written numerous articles on the debt industry.
Laurence Herzenberg
Tel: 289-803-6314
Newmarket website
