Business Debt Restructuring: Modify Terms to Avoid Default

Debt restructuring means modifying the terms of your existing loans—without taking on new debt. Instead of defaulting or declaring bankruptcy, you work directly with your current lenders to make the debt more manageable.

The key difference: You're not getting a new loan (like consolidation) or reducing the amount owed (like settlement). You're changing the terms of what you already have.

What Is Debt Restructuring?

Debt restructuring can include:

Common Restructuring Options

• Lower interest rate: Reduce APR to decrease monthly payment and total interest
• Extended term: Stretch repayment over longer period (lower monthly payment)
• Reduced monthly payment: Temporarily or permanently lower payment amount
• Interest-only period: Pay only interest for 6-24 months
• Payment deferral: Skip payments for 3-6 months, added to end of loan
• Principal reduction: Rare, but some lenders will reduce amount owed
• Balloon payment extension: Push balloon payment out several years
• Convert variable to fixed rate: Stabilize payments

Restructuring vs. Other Options

When Lenders Will Restructure

Lenders restructure when it benefits them more than the alternatives. They'll consider it when:

You Have Leverage

• Documented hardship: Revenue decline, unexpected expense, market conditions
• Good payment history: You've been current until recently
• Business is viable: Just needs temporary relief
• Bankruptcy is alternative: They'd rather restructure than get nothing in bankruptcy
• Collateral has limited value: They can't recover much through repossession

Math Makes Sense for Lender

• Modified payments = more total recovery than default/bankruptcy
• Avoiding foreclosure/repossession costs
• Maintaining performing loan (vs. non-performing asset)
• Preserving relationship with borrower

How to Request Debt Restructuring

Step 1: Assess Your Situation

• Calculate current monthly debt payments
• Determine what you can afford (realistically)
• Understand why you're struggling (temporary vs. permanent)
• Prepare financial documentation (P&L, bank statements)

Step 2: Prepare Your Hardship Case

Lenders need to understand WHY you need restructuring. Document:

• What happened: Revenue decline, major expense, industry downturn, key client loss
• Current situation: Monthly income, expenses, cash flow
• What you need: Specific modification request (lower payment, extended term, etc.)
• Your plan: How you'll return to financial stability

Step 3: Contact Lender

Call the Right Department:

• Ask for "Loan Servicing" or "Hardship Department"
• Explain you're experiencing hardship and want to discuss modification
• Don't wait until you're already behind—act early

What to Say:

Step 4: Submit Formal Request

Most lenders require written hardship request. Include:

• Hardship letter (explain situation, request specific modification)
• Recent financial statements (P&L, balance sheet)
• Bank statements (3-6 months)
• Tax returns (last 2 years)
• Cash flow projection (showing how modified terms will work)

Step 5: Negotiate Terms

Lender will review and make counter-offer. Common negotiations:

• You request: 3% interest rate reduction
• They counter: 1% reduction for 12 months, then review
• You negotiate: 2% reduction for 24 months

Get Everything in Writing:

• Modified interest rate
• New payment amount
• New term length
• Any fees associated with modification
• Whether it affects your credit reporting

Types of Restructuring by Loan Type

SBA Loans

Options:

• Deferment (up to 6 months)
• Extended maturity date
• Temporary payment reduction
• If in default: Offer in Compromise

Process: Work with current lender (not SBA directly, unless loan has defaulted)

Bank Term Loans

Options:

• Rate reduction (if rates have fallen)
• Extended amortization
• Temporary interest-only period

Process: Call relationship manager or loan servicing department

Credit Cards

Options:

• Hardship program (reduced APR, fixed payment plan)
• Typically 6-12 month programs
• Account usually closed during program

Process: Call card issuer, ask for "hardship department"

Equipment Financing

Options:

• Extended term
• Temporarily reduced payment
• Refinance with same lender at current equipment value

Process: Contact lender's workout or special assets department

Commercial Real Estate Loans

Options:

• Balloon payment extension (push out 1-5 years)
• Rate reduction
• Temporary debt service reduction

Process: Submit formal loan modification request with updated property financials

Real-World Restructuring Examples

Example 1: Extended Term

Before:

• Loan balance: $200,000
• Interest rate: 8%
• Remaining term: 5 years
• Monthly payment: $4,056

After Restructuring (Extended to 10 years):

• Loan balance: $200,000 (unchanged)
• Interest rate: 8% (unchanged)
• New term: 10 years
• New monthly payment: $2,427
• Savings: $1,629/month

Trade-off: Pay more total interest over life of loan, but immediate cash flow relief

Example 2: Rate Reduction

Before:

• Loan balance: $150,000
• Interest rate: 12%
• Term: 7 years remaining
• Monthly payment: $2,529

After Restructuring (Rate Reduced to 8%):

• Loan balance: $150,000
• Interest rate: 8%
• Term: 7 years
• New monthly payment: $2,285
• Savings: $244/month + $17,136 total interest

Example 3: Interest-Only Period

Before:

• Loan balance: $100,000
• Interest rate: 10%
• Monthly payment: $2,125 (principal + interest)

After Restructuring (12 months interest-only):

• Monthly payment for 12 months: $833 (interest only)
• Temporary savings: $1,292/month
• After 12 months: Resume regular payments (slightly higher to catch up)

Fees and Costs

Restructuring isn't always free. Expect:

• Modification fee: 1-2% of loan balance (sometimes waived)
• Processing fee: $250-1,000
• Legal fees: If attorneys involved (lender's fees may be passed to you)
• Appraisal/valuation: For secured loans (property, equipment)

Total costs: Typically $1,000-5,000 depending on loan size and complexity

Negotiate fees: If you're in hardship, request fee waiver or add fees to loan balance

Credit Impact of Restructuring

If You're Current on Payments

• Minimal to no impact
• Some lenders report as "modified" or "payment plan"
• Better than late payments or default

If You're Already Behind

• Late payments already reported (damage done)
• Restructuring helps you get current
• Better than continued delinquency

Best Practice

Ask lender: "How will this modification be reported to credit bureaus?" Get answer in writing before agreeing.

When Restructuring Won't Work

Lenders may decline restructuring if:

• You're already in default (90+ days late): Past workout window, may need settlement or bankruptcy
• Business is clearly failing: No viable path to repayment
• Multiple prior restructurings: Already modified several times
• Insufficient documentation: Can't prove hardship or ability to pay modified amount
• Lender policy: Some lenders don't offer modifications

Alternatives if restructuring is denied:

• Debt Consolidation (refinance with new lender)
• Debt Settlement (pay less than owed)
• Chapter 11 Bankruptcy (court-ordered restructuring)

Frequently Asked Questions

Next Steps