[Music] debt restructuring is a process that allows a private or public company or a sovereign entity facing cashflow problems and financial distress to reduce entry negotiate its delinquent debts in order to improve or restore liquidity so that it can continue its operations replacement of old debt by new debt when not on your financial distress is called refinancing out-of-court restructurings also known as workouts are increasingly becoming a global reality a debt restructuring which involves a reduction of debt and an extension of payment terms is usually a less expensive alternative to bankruptcy the main costs associated with debt restructuring are the time and effort negotiating with bankers creditors vendors and tax authorities 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 historically debt restructuring has been the province of large corporations with financial wherewithal in the great recession that began with the financial crisis of 2007 to 8 a component of debt restructuring called at mediation emerged for small businesses with revenues under five million dollars like that restructuring debt mediation is a business to business activity and should not be considered the same as individual debt reduction involving credit cards unpaid taxes and defaulted mortgages in 2010 that mediation has become a primary way for small businesses to refinance in light of reduced lines of credit and direct borrowing that mediation can be cost effective for small businesses held end or void litigation and is preferable to filing for bankruptcy while there are numerous companies providing restructuring for large corporations there are few legitimate firms working for small businesses legitimate debt restructuring firms only work for the debtor client not as a debt collection agency and should charge fees based on success among the debt situations that can be worked out in business-to-business debt mediation are lawsuits and judgments delinquent property machinery equipment rentals / leases business loans or mortgage on business property capital payments due for improvement / construction invoices and statements disputed bills and problem debts 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 dead 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 as a 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 the chapter 11 bankruptcy debt for equity swaps are one way of dealing with subprime mortgages a householder unable to service his debt on a one hundred and eighty thousand dollars mortgage for example may by agreement with his bank has the value of the mortgage reduced say to one hundred and thirty five thousand dollars or 75 percent of the houses current value in return for which the bank will receive 50 percent of the amount by which any resale value when the house is resold exceeds $135,000 a debt for equity swap may also be called a bond holders haircut bond holders haircuts at large banks were advocated as a potential solution for the subprime mortgage crisis by prominent economist economist Joseph Stiglitz testified that bank bailouts are really bailouts not of the enterprises but of the shareholders and especially bondholders there is no reason that American taxpayers should be doing this he wrote at reducing bank debt levels by converting debt into equity will increase confidence in the financial system he believes that addressing bank solvency in this way would help address credit market liquidity issues economist Jeffrey Sachs has also argued in favor of such haircuts the cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer the Fed and other bank regulators would insist that bad loans be written down on the books bondholders would take haircuts but these losses are already priced into deeply discounted bond prices if the key issue is bank solvency converting debt to equity via bond holder haircuts presents an elegant solution to the problem not only is that reduced along with interest payments but equity is simultaneously increased investors can then have more confidence that the bank and financial system more broadly is solvent helping unfreeze credit markets taxpayers do not have to contribute dollars and the government may be able to just provide guarantees in the short term to buttress confidence in the recapitalize institution for example Wells Fargo owed its bondholders 267 billion dollars according to its 2008 annual report a 20 percent haircut would reduce this debt by about fifty four billion dollars creating an equal amount of equity in the process thereby recapitalizing the bank significantly 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 cooperation of the creditor and the enforcement officer it is therefore import 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 into the sale room for auction [Music]

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