Restructuring a citizen's debt

Issues discussed in the material:

• What problems is the debt restructuring procedure designed to solve?
• How can debt restructuring be carried out?
• What are the maximum terms for debt restructuring?
• How the schedule and deadlines for debt restructuring are set
• Does the statute of limitations affect the debt restructuring procedure?

Many organizations and individual entrepreneurs face financial difficulties while developing their business. Lack of profit or insufficient amount of it leads to the fact that the company cannot make payments on existing loans on time. As a result, the debt becomes larger and larger, and this is equally disadvantageous for both the lender and the borrower. We’ll talk about what timeframes for debt restructuring a borrower can expect in our article.

How effective is the debt restructuring process?

In order to begin the restructuring process, an additional agreement must be drawn up between the creditor and the debtor.

The credit company that provided the borrower with financial resources, at its discretion, can change the terms of the previously concluded agreement and reduce the amount of debt by means of: waiver of interest payments, reduction of the interest rate, deferment of payment or extension of the term of the loan agreement.

It is worth noting that each specific case has its own method of debt restructuring, but its choice, as well as its effectiveness, depend, first of all, on the creditor. Based on what factors does a financial organization decide on a possible debt restructuring and determine the timing and stages of its implementation? The lender's attention is drawn to the following points: the state of accounts and cash flows on them, the presence of sources of additional income, as well as a general analysis of information about the status of the borrower.

general information

Restructuring is beneficial to both parties in the event of debt or late payments. It is part of the pre-trial dispute resolution procedure. Appeal to the court does not always lead to actual collection of the debt.

The initiative for such an agreement can come from both the creditor and the debtor. The debtor may send the other party a request to change the terms of the previously concluded agreement. He must attach documents to his application that will confirm his financial difficulties. The creditor, if he is the initiator, sends a proposal for restructuring along with the claim to the debtor.

The concluded restructuring agreement becomes the main contract.

Methods and types of debt restructuring

As we noted above, there are several ways to restructure financial debts, so before starting this procedure, the lender and the borrower must agree on choosing the most effective one. Since the restructuring scheme also depends on the specific type of debt obligation, we propose to dwell in more detail on each of its methods.

Prolongation.

This is the most common type of financial debt restructuring, which involves increasing the loan term and reducing monthly payments. But, prolongation usually implies an increase in the total loan amount due to the accrual of additional interest.

Let's look at the mechanism of its action using a specific example.

Let’s say an organization received a loan from a bank in the amount of 5 million rubles for a period of 18 months at 20% per annum.

In accordance with the initial terms of the loan, the overpayment on this loan will be approximately 792 thousand rubles (subject to differentiated payments).

Now imagine that unexpected difficulties in business development led to the fact that the company had to ask the bank to restructure the debt by prolonging it immediately after receiving the loan payment. The lender made concessions and increased the loan term exactly twice, i.e. to 36 months.

Through a series of calculations, we obtain a new amount of overpayment on the loan taken out, which will amount to 1.53 million rubles.

Thus, with the increase in the debt repayment period, the total amount of overpayment increased significantly.

Reducing the interest on the loan.

This type of debt restructuring is the most desirable for the borrower, but banks do not often offer such conditions to their debtors. Reducing the loan term is possible only if there is high loyalty on the part of the bank and an ideal credit history of the borrower.

Change of payment schedule.

This method of debt restructuring is especially relevant for those borrowers whose business is associated with seasonal fluctuations in demand for the product produced or services provided. In this case, the bank can change the payment schedule taking into account the characteristics of the debtor’s income generation.

Credit holidays

– a fairly popular type of credit debt restructuring. Credit holidays can represent a deferment of payment only on the principal debt, i.e. the borrower continues to pay interest monthly according to the established schedule, and the payment of the principal debt is postponed by the bank for a certain period.

In addition, credit holidays can be provided by the bank in relation to all loan payments, including interest. Please note that credit holidays also have their disadvantages: when their term ends, the payment amount will increase, since the borrower will have to catch up with the debt repayment schedule. In addition, due to the accrual of additional interest, the total overpayment on the loan will increase.

Changing the loan currency.

Another method of restructuring credit debt, which is used in cases where, after the loan was issued to the borrower, there was a rapid change in the exchange rate (for example, devaluation).

Refinancing.

This method is considered the most favorable for the borrower. Its essence is to provide the debtor with a new credit loan on more favorable terms, while part of the amount received is automatically used to fully repay the debt under the previous obligation. Plus, when refinancing, banks often cancel the borrower’s debts for accumulated penalties.

In addition to the above, in the banking sector there are other ways to restructure the financial debt of individual entrepreneurs and legal entities. Among these methods, the bank can choose the most suitable one, depending on the financial solvency of a particular client:

Example of a debt restructuring agreement

Debt restructuring agreement

Perm October 05, 2021

Limited Liability Company "Liama", OGRN 498765462, located at the address: Russia, Perm region, Perm, Pogranichny Ave., 17, office. 105, represented by director Arkady Sergeevich Valeriev, acting on the basis of the Charter, hereinafter referred to as “Creditor”, on the one hand, and

Limited Liability Company "Triada", OGRN 498764364, located at: Russia, Kemerovo region, Kemerovo, st. Shakhterskaya, 38, represented by director Geonova Alina Dmitrievna, acting on the basis of the Charter, hereinafter referred to as the “Debtor”, on the other hand, collectively referred to as the “parties”, have entered into this agreement as follows:

1. The parties agreed to restructure the debt of the Debtor to the Creditor under assignment agreement No. 9/C dated 03/01/2018 as of the date of signing this agreement in the amount of 428,520 rubles, including 390,000 rubles. – amount of the principal debt, 38,520 rubles. – the amount of accrued interest.
2. Debt restructuring is carried out by providing a deferment on debt payment and the Debtor providing a bank guarantee to PJSC ZapSibBank (hereinafter referred to as the “Guarantor”) dated October 1, 2018 in the amount of 429,000 rubles.
3. The Debtor undertakes to ensure repayment of the debt to the Creditor in full by December 1, 2021 by transferring funds to the Creditor's current account.
4. If the Debtor fails to fulfill the obligation to pay the debt before the date specified in clause 3 of this agreement, the Creditor sends a written request to the Guarantor to pay the debt of the Debtor in the amount in accordance with clause 1 of this agreement. The creditor sends the claim to the Guarantor by December 25, 2021. Repayment of the debt of the Debtor is carried out by the Guarantor in the manner and within the time limits provided for by the bank guarantee.
5. From the date of signing of this agreement, penalties for untimely repayment by the Debtor of obligations under the monetary obligation under which the restructuring is being carried out are not accrued.
6. In all other respects that are not provided for in this agreement, the Parties are guided by the current civil legislation of the Russian Federation.
7. This agreement comes into force from the moment it is signed by the Parties and is valid until they fully fulfill their obligations.
8. The Agreement is drawn up in two copies having equal legal force, one for each Party.
9. Details and signatures:

Creditor:

LLC "Liama", OGRN 498765462, address: 614051, Russia, Perm region, Perm, Pogranichny pr., 17, office. 105

Director A.S. Valeriev

Debtor:

Triada LLC, OGRN 498764364, address: 650015, Russia, Kemerovo region, Kemerovo, st. Shakhterskaya, 38

Director A.D. Geonova

Establishing conditions and terms for debt restructuring: step-by-step instructions

Both the bank and the borrower company can take the initiative to restructure the loan debt. Financial experts recommend that insolvent organizations be the first to initiate a restructuring procedure, without waiting for failure to repay debts, accrual of fines and penalties.

Now let's move on to consider step-by-step instructions for restructuring debt obligations.

Step 1: Meet with creditors.

The first stage is an objective analysis of the financial condition of your organization. You must honestly answer the question: does the company have a sufficient amount of material resources to make timely payments on all debt obligations. If the answer is no, you must initiate a meeting of all creditors of your organization.

At the meeting, you should talk about the current state of affairs, describe an approximate strategy for improving the financial situation and proceed to a joint discussion of further interaction with creditors. It is not recommended to postpone such a meeting, since after the organization violates the deadlines for making regular payments, the attitude of creditors towards the borrower will significantly worsen. Your task is to show your readiness to cooperate, demonstrate confidence in the future and the possibility of a quick way out of a difficult situation.

Please note that starting negotiations separately with each creditor at the first stage is not a good idea. So, you are unlikely to be able to quickly reach an agreement on debt restructuring, because each creditor will have its own vision of the current situation, its own requirements, and, most likely, a lack of trust in other credit institutions.

At the first meeting, creditors will want to hear information about the total amount of debt, the capital available to the borrower, as well as approximate provisions of the anti-crisis strategy and information about the prospects for business development. However, even if you cannot provide complete information on the above points, this is not a reason to delay the start of interaction with creditors regarding restructuring and violate debt repayment deadlines.

If during the meeting you are asked questions to which you cannot immediately give an accurate and detailed answer, you can always set a time frame during which the company will provide creditors with all the information they are interested in.

In the process of communicating with creditors, you must not only inform them about the current state of affairs at the enterprise, but also determine the time frame after which the company will be able to resume payments on existing loans.

Step 2. Get a moratorium on loan repayments.

At a meeting with creditors regarding the restructuring of your debt, you will need to not only discuss the important nuances outlined in the description of the previous stage, but also agree on a moratorium on debt payments. This definition refers to the period during which the organization will not be able to meet its loan obligations. A moratorium on debt payments will allow you to get a reprieve in order to develop an anti-crisis action plan and begin to implement it.

You can argue your request for a moratorium by saying that the company needs time to agree on loan restructuring by writing a corresponding statement. The standard moratorium period on debt payment is approximately three months, with the possibility of extension by mutual agreement of the parties. A shorter period of time is often not enough, and a longer moratorium period is quite difficult to negotiate with the bank. But please note that after signing the moratorium agreement, restrictions on certain actions will be imposed on the debtor company. Thus, an organization may be prohibited from:

• pay dividends;
• increase the total amount of debt by attracting new loans and credits;
• issue guarantees and warranties;
• sell or pledge assets without the approval of creditors.

If your organization has several lenders, it will be better if they create a coordination committee, which will include several representatives of the largest credit companies. Members of the coordination committee, for additional remuneration (its amount depends on the amount of debt and the complexity of the current situation), will conduct further negotiations on debt restructuring, analyze the correctness of all information provided by the debtor, and also take part in the development and approval of the necessary financial documents.

If the debtor company is a fairly large organization, negotiations with creditors on debt restructuring may last more than one year.

Step 3. Determine the stages of corporate loan restructuring and the work to be done.

Restructuring the debt of an individual entrepreneur or organization is accompanied not only by financial losses, but also by the expenditure of time and management resources. The last nuance is often underestimated by the borrower, which causes an increase in the terms of negotiations regarding restructuring or even leads to failure of the procedure.

From practice it follows that negotiations with a bank regarding debt restructuring are a fairly long process, especially if the borrowing company is the owner of a large business and large-scale debts. That is why it is necessary to carefully prepare for interaction with a credit institution from the very beginning and appoint a competent and responsible employee (several at once) for these purposes.

In medium-sized organizations, responsibilities for interaction with the bank are usually assigned to the CFO. In large companies, the contact person most often becomes one of the deputy managers responsible for attracting financing, for example, the head of the treasury department.

The contact specialist must interact with all creditors, coordinate the activities of various services and consultants of the enterprise, have sufficient authority to make operational decisions, and also regularly report to the company’s management about the progress of negotiations, results achieved and emerging problems.

At this stage, a general algorithm for the restructuring procedure should be determined and a list of upcoming work should be drawn up. It is very important to make as accurate calculations as possible regarding the amounts that the organization will need to spend on the cost items associated with the restructuring. For large businesses, these amounts can be in the hundreds of thousands of dollars. Please note that members of the creditor coordination committee, external consultants, external lawyers, etc. will require payment for their work.

Do not forget about developing a financial model indicating the planned profit and possible losses for a period of at least five years (preferably on a quarterly basis), since most lenders want to see exactly this type of forecast.

Debt Restructuring Agreement template: download sample

Debt Restructuring Agreement Template:

Agreement

on debt restructuring

Izhevsk

"17" December 2021

LLC "Guatemala", hereinafter referred to as the "Creditor", represented by General Director Akhmetov Rustam Rustamovich, acting on the basis of the Charter, and LLC "Astra", hereinafter referred to as "Debtor", represented by General Director Sorokin Petr Petrovich, acting on the basis of the Charter , collectively referred to as the “Parties”, and individually as the “Parties”, signed this agreement on debt restructuring to loan agreement No. 12 dated March 13, 2020 (hereinafter referred to as the “Agreement”) as follows:

• The parties decided to restructure the debt of the Debtor to the Creditor under loan agreement No. 12 dated March 13, 2020 as of the date of signing this agreement in the amount of 346,513 rubles, including 320,000 rubles. – amount of the principal debt, 26,513 rubles. – the amount of accrued interest.
• Debt restructuring is carried out by providing a deferment on debt payment and the Debtor providing a bank guarantee to PJSC ROSTBank (hereinafter referred to as the “Guarantor”) dated December 17, 2020 in the amount of RUB 346,513.
• The Debtor undertakes to pay the debt to the Creditor in full by June 30, 2021 by transferring money to the Creditor’s current account.
• If the Debtor does not pay the debt by the date established in clause 3 of this document, the Creditor sends a written request to the Guarantor to pay the amount of the debtor's debt in the amount in accordance with clause 1 of this agreement. The creditor sends the claim to the Guarantor by July 30, 2021. Repayment of the debt of the Debtor is carried out by the Guarantor in the manner and within the time limits approved by the bank guarantee.
• From the date of signing of this document, penalties for untimely repayment by the Debtor of obligations under the monetary obligation under which the restructuring is carried out are not accrued.
• In all other respects that are not established by this agreement, the Parties are guided by the current provisions of the Civil Code of the Russian Federation.
• This document comes into force from the date of its signing by the Parties and is valid until they fully fulfill their obligations.
• The Agreement is drawn up in two copies having equal legal force, one for each Party.

Details of the Parties:

Creditor

Debtor

LLC "Guatemala", 426009, Izhevsk, st. Kolkhoznaya, 45, tel., TIN 1831231234, checkpoint 876345234, OGRN 6784563636363

LLC "Astra", 426008, Izhevsk, st. Lesnaya, 56, of. 12, tel., TIN 5612342345, checkpoint 567345123, OGRN 5673452341234

Signatures of the parties:

Lender: Akhmetov / R.R. Akhmetov

Debtor: Sorokin / P.P. Sorokin

What are the maximum terms for debt restructuring?

In cases where debt restructuring is carried out as part of a citizen’s bankruptcy, its maximum period should not exceed 3 years (if the plan was approved by a meeting of creditors).

If the plan as part of the bankruptcy procedure was approved by the court, the debt restructuring period should be limited to two years. During this period, the citizen will have to fulfill all debt obligations.

Other terms are provided for by debt restructuring by agreement of the parties. In this case, the period for debt restructuring will depend on what agreements the debtor and creditor reached as a result of negotiations.

The period can vary from several months to several years, because this issue is not limited by law.

But it is unlikely that the creditor will make such concessions and agree to extend the restructuring period by ten years. As a rule, banks prefer to resolve the issue of full repayment of debt within one to three years.