Explanation of Debt Restructuring
When the company gets in trouble with creditors, one of the options that it may have available is to restructure debt. Restructuring debt is a process that involves changing the terms of the original agreement so that the debtor can stay in business and continue making payments to the creditor.
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Debt Restructure
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When a creditor and debtor enter into arrangement, they agree to terms with the other party. The creditor agrees to give a certain amount of money or credit to the debtor. The debtor also agrees to make payments on a regular schedule or to have the debt paid off by a certain amount of time. The debtor will also agree to a specific interest rate or fee in most cases. With a debt restructure, one or more of these terms is changed so that the company can afford its debt repayments.
Debt-For-Equity
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One of the ways that that can be restructured is through the use of a debt-for-equity swap. With a debt-for-equity swap, the company agrees to give a certain amount of equity to its creditors in exchange for forgiveness of the debt. For example, if a debtor owed $1 million to a creditor, the debtor would simply give the creditor $1 million worth of equity in the company. Then the company would have to share profits with this creditor for the duration of the business.
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Creditor Composition
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Another approach that many companies take when restructuring debt involves creditor composition. This is an agreement that debtors enter into with creditors in which they agree to make a fixed payment for a certain amount of time. If the amount paid is less than what is owed, the creditor simply forgives the rest of the debt. This is also a form of debt settlement and it helps the debtor get out from under the debt sooner than normal.
Chapter 11
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When the company is unable to restructure its debt through normal means, it can file for Chapter 11 bankruptcy. With Chapter 11 bankruptcy, the company gets help from the United States court system. With Chapter 11, the company enters into a type of debt reorganization in which the company pays the court and the court pays its creditors. After making payments for a certain amount of time, the court discharges the rest of the outstanding debt.
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