In the event of over-indebtedness (which means that all existing debts can no longer be met) or even before this point is reached, there are solutions for restructuring credit and therefore rebalancing the debt. finances and the family budget. Learn about three options in this article and how to proceed in each.
What is credit restructuring?
Credit restructuring is a process of negotiating the customer with the bank, which may result in:
- A consolidated credit (which usually only applies if there are more than two loans pressuring the effort rate);
- A restructuring of the credit repayment plan, extending the repayment term or improving other loan conditions);
- Transfer from loan to another bank (something that is more common in home loans).
A credit restructuring does not necessarily have to result in debt consolidation and it is not a sine qua non condition for a consumer to hold several credits in order to be able to apply for a restructuring (unlike consolidated credit).
In the event of a consumer defaulting on debt, a credit restructuring process always takes place before the case goes to court (which usually happens when bankruptcy is already in place).
Take for example the couple Piguras whose respective monthly installments of the credits they have are as follows:
|Loan Type||Monthly payment||Deadline to finish repaying||Total Credit Amount|
|Housing||450 €||7 years||$ 37,800|
|Car||$ 175||1 year||$ 2,100|
|Credit Card (Purchase of New Appliances)||$ 155||7 months||$ 1.085|
|Personal credit (works in the kitchen)||$ 204||2 years||€ 4,896|
Given that the Piguras couple’s monthly net income is $ 1,400, as long as they have all these loans contracted, they are over-indebted, they only have to spend 984 dollars per month on loans, apart from normal daily expenses (with transport, power, water, electricity, TV Net Voice package, etc.).
In order to restructure these debts, what options does this family have? Let’s look at each of the loan renegotiation assumptions in detail.
Option 1: Consolidated Credit
Holding four loans at the same time, one of the solutions available to the Piguras couple is to combine credits, aggregating them all in one via consolidated credit. This is a solution that allows different loans taken from different banks to cluster in a financial institution, resulting in a single monthly payment and a substantial reduction in the monthly repayment.
In the situation of the Fig trees couple, through a consolidated credit – in which all the debts that had a maturity of 10 years combined – managed to go from a monthly payment of 984 dollars to 696 dollars, which translated into a monthly relief of 288 dollars.
Option 2: Extension of the amortization term
Realizing that they may be unable to repay their debts, the Piguras couple must warn their bank that they are experiencing economic difficulties and that they are in danger of defaulting before they start to default on their monthly installments.
Therefore, the bank must re-evaluate the household’s financial capabilities and propose a more tailored solution to this new reality.
If, on the contrary, the Piguras couple have already defaulted (which means they have overdue monthly payments), they can resort to the so-called PERSI (Extrajudicial Procedure for Settlement of Defaults) through the bank itself.
This is nothing more than a credit restructuring process whereby the financial institution must submit a (or even more) renegotiation proposal, followed by a phase in which consumers negotiate with the bank to try to find the best possible solution. .
This process may result in extending the repayment term, granting a grace period or even cutting interest rates, for example. All these options cause the monthly fee to be significantly reduced.
Note that this credit restructuring is free of charge and financial institutions cannot charge fees for making this assessment. It should also be noted that the request for renegotiation from the bank must be made in writing and must be well founded by means of a letter of request for credit restructuring.
It should also be noted that if the consumer is already in insolvency, then there is no possibility of resorting to PERSI.
Option 3: Transfer to another financial institution
In a situation where the mortgage is assumed to be the most pressing strain on the household effort rate, before defaulting, one should try to transfer home loans to another bank that offers better conditions (namely a higher spread). appealing).
In order to make the transfer, it is first necessary to research the market as well as to make various simulations and proposals in various banks. If one is found to offer better conditions than the current one then the transfer should be made, which basically cancels the previous contract and produces a new one at another institution.
How to avoid over indebtedness?
The best way to avoid over-indebtedness is not to borrow so that the effort rate exceeds 40%. In other words, all your credits should not occupy more than 40% of the household’s monthly net income.
Assuming a maximum ceiling of 40% on the effort rate, if the net monthly income is $ 1,500, then the rent on the house together with any loans should not exceed $ 600.
Credit restructuring is the best way to avoid insolvency. In the event of unemployment, illness, wage cuts or similar reasons, the first step should be to try to renegotiate debts to soften the monthly payments and to continue repaying loans without going bankrupt and without finally losing the house and other property.