Debt Restructuring

The overall process of rearranging a company's debt obligations so that they are easier to meet. See: Chapter 7. See: Chapter 11.

Say a startup secures some loans to pay for the launch of its killer new app. But the roll out takes longer than expected, costs more money than anticipated and customers aren't coming in as fast as the firm had hoped. Revenue is light and paying back those loans is becoming a problem.

The bank that issued the loans faces a choice. If it insists on the original terms, it might push the company into liquidation, in which case it might get pennies on the dollar, or it might not get anything at all, depending on how bad things have gotten. Or it can help make the loans easier to pay back, meaning the company can keep going and keep writing checks to the bank. This process is the debt restructuring.

The terms of each restructuring are different, with the lender and borrower negotiating terms that make sense for that situation. The plan can consist of a combination of different tactics: some part of the loan might be forgiven; part or all of the loan might be spread out over a longer time period (making the regular payments lower); or the bank might accept some other type of payment, taking over company assets instead or acquiring company stock in exchange for loan forgiveness.

Bankruptcy represents the ultimate level of restructuring. In this scenario, the process takes place with court supervision. A judge is brought in to keep things orderly and approve all the restructuring steps.