DEBT
MANAGEMENT
GROUP 5
INTRODUCTION
TO DEBT
MANAGEMENT
Debt management is the process of
effectively planning and controlling your
borrowing to ensure that you can meet
your financial obligations without
experiencing undue stress or hardship.
It involves understanding your debt,
creating a budget, and developing
strategies to reduce your debt and
improve your financial situation.
THE IMPORTANCE
OF DEBT
MANAGEMENT
FINANCIAL STABILITY
Avoiding Bankruptcy: Effective debt
management can help you avoid bankruptcy,
which can have severe consequences for your
credit, finances, and overall quality of life.
Preventing Foreclosure: By managing your
mortgage debt responsibly, you can prevent
foreclosure on your home, a major financial
disaster.
Maintaining Creditworthiness: Paying your
debts on time and reducing your debt-to-
income ratio can improve your credit score,
making it easier to borrow money in the future
for purchases like cars or homes.
REDUCED STRESS
Financial Peace of Mind: Managing
your debt can alleviate financial
stress and provide you with peace
of mind.
Improved Well-being: Excessive
debt can lead to anxiety,
depression, and other mental
health issues. By effectively
managing your debt, you can
improve your overall well-being.
ACHIEVING
FINANCIAL GOALS
Saving for the Future: Debt
management can free up more of
your income to save for important
financial goals, such as retirement,
education, or a down payment on a
home.
Building Wealth: By reducing your
debt and increasing your savings,
you can build wealth over time.
PROTECTING YOUR LOVE
ONES
Financial Security for Family:
Effective debt management
can help ensure the financial
security of your family,
especially in the event of
unexpected circumstances like
job loss or illness.
:
1. Personal Debt
TYPES This refers to debt incurred by individuals
for personal use.
OF 2. Corporate Debt
This is debt incurred by businesses to
DEBT finance operations, investments, or
growth.
3. Government Debt
This is debt incurred by governments to
OVERVIEW OF DEBT
INSTRUMENTS
• Secured Loans: These loans are
backed by assets that can be
seized by the lender if the
LOANS borrower defaults on the loan.
Examples include mortgages, auto
loans, and equipment loans.
A loan is a direct transfer of funds from a
• Unsecured Loans: These loans are
lender to a borrower, with the expectation
that the borrower will repay the principal not backed by collateral.
amount plus interest within a specified Examples include personal loans,
time frame. Loans can be secured by credit card debt, and student
collateral or unsecured.
loans.
• Corporate Bonds: Bonds
issued by corporations.
BONDS
• Government Bonds:
A bond is a debt security issued by a Bonds issued by
corporation, government, or other entity to
raise capital. When you buy a bond, you are governments.
essentially lending money to the issuer. In
return, the issuer promises to pay you a fixed
interest rate over a specified period of time
• Municipal Bonds: Bonds
and then repay the principal amount at
maturity.
issued by local
governments.
CREDIT LINES
A credit line is a revolving line of credit that allows a
borrower to borrow funds up to a pre-approved
limit. As the borrower repays the debt, the credit
limit is restored, allowing them to borrow again.
Credit cards are a common example of credit lines.
DEBT
MANAGEMENT
S T R AT E G I E S F O R
INDIVIDUALS
• Budget and debt repayment
strategies (e.g., snowball vs.
avalanche method)
• Understanding credit scores and
their impact on borrowing
• Role of financial counselling in debt
management
SNOWBALL METHOD
BUDGETI • Paying off your debt in order
NG AND of smallest amount owed to
the largest amount owed
DEBT regardless of interest rate.
REPAYME AVALANCHE METHOD
NT • Paying off debt from highest
interest rate to lowest
STRATEGI
UNDESTANDING CREDIT SCORES AND
THEIR IMPACT ON BORROWING
• > A higher score means you're more
trustworthy, so you'll get better loan terms and
lower interest rate.
• > If your score is low, it could cost you more
when borrowing, or you might struggle to get
Here are some simple ways to
boost your credit score:
• 1. Pay bill on time: Late payments can really drag your score down. Set
reminders or automate payments to stay on track
• 2. Keep credit utilization low: Try to use less than 30% of your available
credit. If you have a credit limit of $1000, try to keep your balance under
$300.
• 3. Don't close old accounts: The length of your credit history matters.
Keeping old accounts open (even if you don't use them) can help.
• 4. Check your credit report: Regularly review your credit report for errors. If
you spot something wrong, dispute it to get it corrected.
ROLES OF FINANCIAL
COUNSELING IN DEBT
MANAGEMENT
• > Financial counseling plays a huge role in managing debt, and
here's how. First off, its like having a trusted friend who knows
the ins and out of money. They help you understand your
finances, create a budget, and figure out where your money is
really going.
• > They can even guide you on debt repayment strategies, like
the snowball or avalanche methods, so you can tackle your debt
effectively.
DEALING WITH HIGH-INTEREST
DEBT
• What are the best way to pay off high-interest
debt?
> Use the debt avalanche repayment
methods. The avalanche approach is a
payment method that targets high-interest
debt. To start, rank your debts in order of
interest rate and fucos on repaying the
C O R P O R AT E
DEBT
MANAGEME
NT
DEBT VS EQUITY
FINANCING
( P r o s a n d C o n s f o r
B u s i n e s s e s )
DEBT FINANCING
PROS CONS
• Tax benefits: Interest • Repayment obligation:
payments on debt are tax- Regular payments can
deductible. strain cash flow, especially
• Retention of ownership: during downturns.
Existing shareholders • Increased risk: High levels
maintain control over the of debt elevate financial
company. risk and can impact credit
• Predictable payments: ratings.
Fixed repayment schedules • Restrictive covenants: Debt
EQUITY FINANCING
PROS CONS
• No repayment obligation: • Dilution of ownership:
Equity does not require Issuing new shares can
regular payments, reducing dilute existing
cash flow pressure. shareholders' control.
• Shared risk: Investors bear • Higher cost of capital:
the risk of the business not Equity can be more
performing well. expensive than debt,
• Potential for growth: Equity especially in low-
financing can attract interestrate environments.
CORPORATE BOND ISSUANCE AND ITS
ROLE IN FINANCING
Corporate bonds are debt securities issued by companies
to raise capital.
ROLE IN FINANCING
• Access to Capital: Bonds provide a means for
companies to secure large amounts of capital for
expansion, R&D, or refinancing existing debt.
• Long-term Financing: Bonds typically have longer
maturities, allowing companies to plan for future
investments.
• Market Perception: Issuing bonds can signal
financial stability and confidence in future cash
flows, potentially enhancing the company’s
LEVERAGING
DEBT FOR
BUSINESS
GROWTH
BENEFITS AND RISK
BENEFITS RISK
• Capital Availability: Debt financing can • Financial Strain: Increased
provide immediate capital for growth
debt can lead to cash flow
initiatives without diluting ownership.
challenges, especially if the
• Operational Leverage: Businesses can
use debt to finance new projects, business does not generate
potentially increasing returns on anticipated returns.
equity when those projects succeed.
• Interest Rate Risk: Rising
• Cost Efficiency: If a company can
interest rates can increase
borrow at lower interest rates than the
expected return on investment, borrowing costs and affect
leveraging debt can enhance profit margins.
profitability.
• Credit Risk: High leverage may
lead to downgrades in credit
MANAGING CORPORATE DEBT DURING
FINANCIAL DOWNTURNS
Effective debt management during downturns is
crucial for survival and long-term viability.
• Cash Flow Management: Maintain
strong cash flow management
practices to ensure timely debt • Diversification: Explore alternative
servicing. Prioritizing essential financing sources, such as
expenses can help preserve liquidity. government relief programs or equity
• Debt Restructuring: Engage with financing, to reduce reliance on
creditors to restructure debt terms, existing debt.
such as extending maturities or • Communication: Maintain open
adjusting interest rates to ease communication with stakeholders,
repayment pressures. including lenders and investors, to
• Cost Reduction Strategies: build trust and potentially negotiate
Implement cost-cutting measures to favorable terms during tough times.
improve profitability and cash flow,
ensuring that necessary payments
can be met.
DEBT
RESTRUCTURI
NG
WHAT IS DEBT RESTRUCTURING?
• Debt restructuring is the process of
modifying debt terms to ease repayment,
using methods like extending deadlines or
reducing interest, which is crucial to avoid
defaults and maintain financial stability.
METHODS AND IMPORTANCE OF
DEBT RESTRUCTURING
1. Prevents Default or Bankruptcy: It helps borrowers avoid default and the
potential legal and financial consequences of bankruptcy.
2. Improves Cash Flow: By altering repayment terms, borrowers can reduce
their monthly payments, freeing up cash for other expenses.
3. Preserves Business Viability: For businesses, restructuring enables them
to continue operations, which can save jobs and maintain market presence.
4. Protects Credit Ratings: Successfully restructuring debt can help maintain
or improve a borrower ’s credit rating by preventing missed payments.
5. Mutual Benefit for Creditors: Creditors are likely to recover more of their
loans through restructuring than through defaults or bankruptcy, which might
yield little to no recovery.
N E G O T I AT I N G W I T H C R E D I TO R S F O R D E B T R E L I E F C O R P O R AT E B A N K R U P T C Y A N D R E O R G A N I Z AT I O N
Negotiating with creditors for debt relief involves Corporate bankruptcy and reorganization involve legal
discussing and altering the terms of your debt to processes that allow a financially distressed company
make it more manageable, often resulting in lower to restructure its debts and operations to regain
payments, reduced interest rates, or debt forgiveness. profitability while protecting itself from creditors.
CASE STUDIES OF SUCCESSFUL AND
FAILED DEBT RESTRUCTURING
SU C C ESS F U L D E B T FA IL E D D EB T R E S T R U C T U R IN G
R EST R U C T U R IN G
• 1. Uruguay (2003): Uruguay • 1. Argentina (2001 & 2014):
extended debt maturities and Incomplete restructuring led to
reduced interest rates, avoiding a second default and legal
default and stabilizing the battles with creditors.
economy. • 2. Puerto Rico (2015): Delayed
• 2. Greece (2012): Greece restructuring resulted in
reduced its debt by 53.5%, prolonged economic
helping it stay in the Eurozone stagnation, despite a deal in
and regain market access. 2020.
• 3. Iceland (2008): Iceland • 3. Lebanon (2020): Lack of
THANK
YOU!!!
