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Debt restructuring: Avoid Bankruptcy

Debt restructuring allows a private or public companies to reduce and renegotiate its delinquent debts

Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

Out-of court restructurings, also known as workouts, are increasingly becoming a global reality. A debt restructuring is usually less expensive and a preferable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms.

In the United States, small business bankruptcy filings cost at least $50,000 in legal and court fees, and filing costs in excess of $100,000 are common. By some measures, only 20% of firms survive Chapter 11 bankruptcy filings.

Debt-for-Equity Swaps

In a debt-for-equity swap, a company's creditors generally agree to cancel some or all of the debt in exchange for equity in the company.

Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. This is because both the debt and the remaining assets in these companies are so large that there is no advantage for the creditors to drive the company into bankruptcy. Instead the creditors prefer to take control of the business as a going concern. As a consequence, the original shareholders' stake in the company is generally significantly diluted in these deals and may be entirely eliminated, as is typical in a Chapter 11 bankruptcy.

Debt-for-equity swaps and the subprime mortgage crisis

Debt-for-equity swaps have also been discussed as a way of dealing with sub-prime mortgages. A householder unable to service his debt on a $180k mortgage for example, may by agreement with his bank have the value of the mortgage reduced (say to $135k or 90% of the house's current value), in return for which the bank will receive 50% of the amount by which any resale value, when the house is resold, exceeds $135k.

Informal Debt Repayment Agreements

Most defendants who cannot pay the enforcement officer in full at once enter into negotiations with the officer to pay by installments. This process is informal but cheaper and quicker than an application to the court.

Payment by this method relies on the co-operation of the creditor and the enforcement officer. It is therefore important not to offer more than you can afford or to fall behind with the payments you agree. If you do fall behind with the payments and the enforcement officer has seized goods, they may remove them to the sale room for auction.

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