Proper debt restructuring protects both debtor and lender

By Rakis Christoforou BBA, CPA/ABV/CFF, MCSI, CGMA, ACFE

Debt restructuring is a process in which a debtor and lender choose to rework the terms and conditions that apply to a loan or other facility currently in force. Sometimes known as debt rescheduling or debt refinancing, this strategy is usually employed when the lender and debtor believe there are sound financial reasons to make changes to an existing loan or other facility contract. In general, it is a compromise where both parties receive some sort of benefit from debt restructuring. The current situation in Cyprus calls for such a compromise.
Many companies and individuals are looking for ways to improve their cash flows with the use of debt restructuring techniques given the present unwillingness of financial institutions to lend them additional money to cover their cash flow needs.

THE PROCESS

The process of debt restructuring can be used in both individual/private and commercial settings. With business debt restructuring, the goal is more often to change the terms of repayment in order to allow the debtor to make better use of available resources needed to operate the business. Cyprus businesses are today open to the idea of a corporate debt restructure, especially if the action involves a long time client and the restructure will preserve the working relationship. Businesses and individuals however, should be ready to develop a strategy after understanding their financial position and their options in order to make a sensible proposal to the lender.

BUSINESSES

Business debt restructuring can be helpful for small businesses as well as large corporations. As with any lending situation, the use of small business debt restructuring is usually aimed at rearranging existing debt so the small business can make the most efficient use of available resources. When the lender is open to altering the terms of payment or other factors in the loan agreement, the action also protects the lender’s interests, in that the restructure minimises the chances of the debtor defaulting in the near future.

INDIVIDUALS

For individuals, the use of debt restructuring can be a powerful tool when financial reverses take place, something we often experience now in Cyprus. For example, if the main source of income is lost and the debtor is not able to secure a new job that is of the same level, it may become difficult or even impossible to continue paying the loan according to the original terms. In order to prevent default and all the expenses associated with that action, the lender should be ready to alter the amount of the monthly payments, or possibly alter the payment schedule itself in an effort to help the debtor regain a sound financial footing.

PROFESSIONAL CONSULTATION AND SOUND STRATEGY