Call Us312-704-0771

Chicago debt collection attorneys

Differences Between Debt Consolidation and Debt Restructuring

Posted on in Loan Modification

Differences Between Debt Consolidation and Debt RestructuringWhen a client is unable to pay a debt, it sometimes makes sense to offer to modify the loan. Though you may lose some money after the modification, it would be less of a loss than if the client filed for bankruptcy and discharged the debt. The modification may also allow you to maintain your relationship with the client. Two forms of modification are debt consolidation and debt restructuring. Though they have some similarities, they are each best suited for certain debtor situations.

Debt Consolidation

With debt consolidation, the debtor enters a new loan agreement that pays for multiple, smaller loans over a longer period of time. Debt consolidation can be attractive to the debtor because:

  • It simplifies payments of multiple loans into one payment;
  • The interest rate on the new loan can be lower than the smaller loans; and
  • The process will likely not hurt the debtor’s credit score.

From the creditor’s perspective, debt consolidation may be preferable to other loan modification options because the debtor is still expected to repay the loan in full. It is an option best suited for clients who are normally in good standing and looking for long-term savings on their debts in exchange for extending the repayment period. It may not help a client who is struggling to make basic payments.

Debt Restructuring

Debt restructuring primarily differs from debt consolidation in that debt restructuring involves modifying the terms of the existing agreement instead of entering a new agreement. Creditors negotiate with debtors to forgive part of the debt, leaving a more affordable balance on the loan. Debtors may be candidates for debt restructuring when they are in financial hardship and considering filing for bankruptcy. The creditor can argue that the debtor may benefit more from negotiating a restructured loan than filing for bankruptcy because:

  • Bankruptcy would hurt the debtor’s credit score more than debt restructuring;
  • Debts such as student loans are not eligible for discharge after bankruptcy; and
  • The discharge would not prevent creditors with secured debts from repossessing the property.

Contact a Chicago Creditor’s Rights Attorney

As a creditor, you must weigh the risks of allowing a debtor to restructure or consolidate its debts. How likely is it that the debtor will be able to continue making payments? Do the new terms of the agreement put you at too much of a disadvantage? A Chicago creditor’s rights lawyer at Walinski & Associates, P.C., can help you answer these questions and determine the correct course of action. To schedule a consultation, call 312-704-0771.


Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
Back to Top