Disadvantages of Debt Restructuring
Debt restructuring refers to a process that is used by companies, primarily to avoid any risk of default that may occur on their company’s existing debt, as well as to take advantage of decreased available interest rates.
Companies usually choose to make use of debt restructuring when they are close to declaring insolvency.
Debt restructuring is often considered the last resort before a company declares bankruptcy and is done for the purpose to either extend the date of which a company’s liabilities must be paid or to reduce interest rates on loans.
With debt restructuring, the company may have the chance to trade their debt for equity. This is done when creditors decide to get rid of some of their outstanding debt, to protect the company. Debt restructuring isn’t only a debt solution for companies, but also for countries that are over-indebted.
Debt restructuring often gets a bad rep for some of its drawbacks. However, there are also many advantages involve, including obtaining legal protection for your company from creditors, making use of a debt elimination process in exchange for your liabilities, the protection of your assets, being granted time for rehabilitating your company, maintaining economic independence, along with the legal personality of a debtor, the preservation of jobs, unblocking debtor’s bank accounts, and more.
Disadvantages – The Bad Side of Debt Restructuring
Even though there are many advantages involved that will help companies repay their debt, as with any solution, there are also disadvantages involved.
Debt restructuring disadvantages include the following:
- During the process of debt restructuring, the administrator will approve all legal actions from the debtor, except for legal actions.
- If your company doesn’t get approved for debt restructuring, then it will be declared bankrupt. Debt restructuring thus acts as a last resort before companies are forced to declare bankruptcy. The only way to prevent this is to get a replacement group to approve the restructuring plan for your company, by means of a court decree.
- Should the terms of a restructuring plan towards a creditor not be fulfilled, the restructuring plan may become legally unenforceable for the creditor.