Common Debt Repayment Strategies Explained

How much would you just love to make your debt disappear? Well, I’m sorry, but there aren’t any debt fairies that can make your money regrets go “poof”, no matter how much those ads on t.v. and the radio promise.

The majority of hard working, next level people we work with, if they have debt, get rid of it the old fashioned way by just getting to work and paying off their debt by spending less or making more.

Debt restructuring and debt consolidation are two debt repayment strategies that people hear talked about, but they don’t always know what they mean, or what the difference is, so, let me break it down for you.

The terms debt restructuring and debt consolidation often get confused or sometimes are used interchangeably, however, they are very different things. Both of these strategies are considerations to help with debt, but they aren’t without their consequences and truly don’t solve the underlying problem. They serve as a consideration from a mathematical perspective, whereas most debt and overspending problems stem from a behaviour, habit or mindset that can be changed or modified. However, since they are possibilities, and they are brought up on occasion, let's define what they are and how they work.

Debt Restructuring

Debt restructuring involves negotiating with the lender to see if they would be willing to forgive part of a debt that the borrower owes to them. There is no new contract created. The original contract is just altered to show more favourable terms to the borrower. The restructure would typically be expressed in a percentage that has been forgiven. For example “45% of the full debt amount has been forgiven”.

The ability for restructuring to work really depends on whether the borrower can pay back the newly negotiated balance and if the lender is even willing to negotiate in the first place. Debt restructuring is typically a last ditch effort by a borrower who is already behind on payments and trying to avoid bankruptcy. Lenders can be receptive to negotiate because through this negotiation they hope to recover at least some of what they are owed. If a borrower were to file bankruptcy the lender may get little, if anything at all, from the borrower. Negotiating with the borrower could also save the lender the costs associated with going through the bankruptcy process.

Debt Consolidation

Debt consolidation is refinancing or rolling all debts into one larger debt. The benefit to the borrower is that they combine all debts into one with a longer term at a (hopefully) lower interest rate, and therefore the payments should be smaller and more manageable. One major problem is that a longer repayment period, even if at a lower interest rate, often results in the overall cost being higher to pay off the debts than had the debts just been paid on the terms they were originally on. Unlike debt restructuring, there is a completely new approval process, contract and terms agreed to.

As you can see, debt restructuring and debt consolidation can be potential options when a borrower has challenges in repaying their debt. There are possible consequences in traveling down these roads though in that they could result in higher interest rates, more interest paid over the long term and even credit score complications. Your absolute best option is to address the behaviours, habits and mindsets that led you to the debt in the first place and then getting to work on a plan to repay the outstanding balance through spending less and possibly making more. It’ll be hard work, but paying off your debts will be one of the most gratifying things you’ll ever do.

If your debt is weighing you down, robbing you of your happiness or keeping you from living the life you want to, it may be time to work with a financial coach to get your finances back in order and free yourself from the stress of debt. 

We help people decrease stress and increase happiness by teaching them how to build healthy spending habits in 1:1 Coaching or Membership. We’d love to see you there!