What’s the Difference Between Debt Consolidation and Debt Restructuring?

Debt consolidation and debt restructuring both have a place in managing debt. Debt consolidation is a strategy that combines your debts. You use a loan or a large credit card to pay off all your debts, then repay that single loan. On the other hand, debt restructuring is when you negotiate with your creditors. You can ask for a lower interest rate, for example, or ask to extend the terms of repayment to give yourself a lower monthly payment.

A key difference between restructuring and consolidating your loan is in the consolidation process. With loan consolidation, you get a new loan or a credit card with a balance transfer, for example, and use it to pay off all your outstanding debts. Then, you make your monthly payment on the new loan. With restructuring, you don’t take out a new loan — you simply speak with your creditors and get new terms for the debts you need to repay.

Which one is right for you? That depends on what you want to do with your debts and how quickly you’d like to repay them. 

Understanding Debt Consolidation

With debt consolidation, you have a few options you can use to access the credit needed to pay off your current debts and move them onto a single repayment plan. 

Some of the options you may want to use to consolidate your debts include:

Personal loans

With personal loans, you can take advantage of lower interest rates through a bank or credit union. This is helpful if you have credit card debt (or other debts with high interest rates) and want to reduce your monthly payments by combining every debt into a single loan. 

Balance transfer credit cards

Balance transfer credit cards are an excellent choice for consolidating debts for a short period of time. For example, some balance transfer credit cards give you 12 months to repay any debts you transfer as long as you make payments on time. Beneficially, there are many balance transfer credit cards with 0% interest during the introductory period.

Debt management plans

Debt management plans are structured debt repayment programs. They typically don’t require a loan and are offered through credit counseling agencies. 

Consolidation can be a good option when you know you have good credit and can get a large consolidation loan or new balance transfer credit card. It’s also beneficial if you have multiple debts open and want to move them all onto one balance to make repayment more straightforward.

What Is Debt Restructuring?

Debt restructuring differs from consolidation because it doesn’t focus on moving all of your debt onto a new loan or credit card. Instead, you negotiate with your creditors to get your interest rate, payments or repayment plan adjusted. Then, you’ll continue making payments on the original loans or credit card balances. 

Negotiating terms with creditors

Usually, debt restructuring is an option you can take advantage of when you can’t afford your payments. Before or shortly after missing a payment, reaching out to your creditors to discuss your options can help you negotiate. Creditors will often negotiate to avoid losing the account because of bankruptcy, letting you get a better rate and (hopefully) avoid bankruptcy as well. 

Key Differences Between Debt Consolidation and Debt Restructuring

Key differences between debt consolidation and restructuring include the following:

Debt consolidation moves your debt onto a single loan or credit card, allowing you to make a single monthly payment. Sometimes, debt consolidation reduces your interest rate overall. That can also help you save money as you pay down your debt over time.

Debt restructuring is different from debt consolidation because you’ll negotiate directly with each of your creditors and keep the debts separate. 

Pros and Cons of Debt Consolidation

Debt consolidation has several pros and cons. Some of the positives include:

• Potentially reducing how much you’ll spend on your debt. Some debt consolidation loans and balance transfers can have interest rates as low as 0%. 
• You’ll have a single payment to make each month. 
• It offers a more straightforward repayment plan, so you can tackle the debt all at once. 

Some negatives of debt consolidation include:

• Needing good credit. If you don’t have good credit, getting a loan to consolidate your debt could be difficult. 
• Transfer fees and other costs. Sometimes, a loan origination fee can be as high as 10% of the cost of the loan. Look for the rate in the fine print.
• The risk of the loan payment being too high. If you have all your debts combined, there’s a risk that your new payment will be higher than the payments for the individual accounts were on their own. 

Pros and Cons of Debt Restructuring

There are some pros and cons of debt restructuring to keep in mind. Positives of debt restructuring include:

• Getting financial relief. You get to reduce your stress by negotiating for a better repayment plan. 
• Avoiding default or bankruptcy. Debt restructuring can help you get caught up on payments you’ve missed and get ahead of your debts. 
• Getting help without good credit. You typically don’t need to meet credit requirements to get help from a lender you already have a credit card or loan through.

While these are good reasons to use debt restructuring, there are also some negatives to choosing this option, such as:

• Not always having lenders willing to work with you.
• A risk to your credit, which could take a hit if you miss payments or have some of your debt discharged. 
• A time delay that won’t help if you need immediate relief. 

Which Option Is Best for You?

What is best for you largely depends on your financial situation. If you have the money to make all your payments but want to organize your debts into a single repayment plan, debt consolidation likely is the better option. This is especially true if you also have good credit. Debt restructuring can cause damage to your credit. Those who are falling behind on payments or had a sudden change in income may want to do debt restructuring. The hit from that will likely be less severe than filing for bankruptcy.

Seek credit counseling from a reputable agency if you’re still not sure. Most are nonprofits and can help you with general financial advice and debt management plans.