What Is Troubled Debt Restructuring?

When a creditor gives a concession to a debtor because of economic or legal grounds relating to the debtor’s financial difficulties, it is called a “troubled debt restructuring.” As a result, in order to qualify as a TDR, two conditions must be met:

The debtor’s financial difficulties necessitate a concession from the creditor.

What happens in a debt restructuring?

When a company is on the verge of bankruptcy, it is possible to restructure its debt. As part of the debt restructuring process, lenders often agree to lower interest rates on loans or to extend the due dates on the company’s debts. These measures increase the likelihood that the company will be able to meet its financial obligations and remain in operation. Creditors are aware that if the company is driven into bankruptcy or liquidation, they would receive considerably less.

Both parties benefit from debt restructuring because the business avoids bankruptcy and the lenders often receive more money than they would in a bankruptcy case..

When it comes to individuals and nations, the processes are nearly same.

What triggers a TDR?

Many financial institutions are adjusting loan terms in the aftermath of the COVID-19 outbreak, in order to better serve their customers.

As a result, institutions must decide whether these loan modifications fall under the criteria of a problematic debt restructuring (TDR) as defined by the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 310-40.

Whether or not a loan is classified as a TDR can be determined using the following steps and definitions.

Loan modifications

Whenever a financial institution restructures a loan and offers a concession to the borrower for economic or legal grounds relating to the borrower’s financial difficulties, a TDR occurs.

Borrowers may receive assets in partial or full repayment of loans under TDRs, which alter the conditions of loans.

There are a variety of ways in which loan conditions can be changed, including but not limited to the following:

Some or all of the remaining term of the loan may be eligible for a lower interest rate.
Maturity extensions at lower interest rates than the current market rates for new loans with the same level of risk.
An agreement to reduce the loan amount or maturity date mentioned in the instrument or other arrangement.

Financing institutions have been encouraged by regulators to undertake loan modifications and loan-adjustment initiatives to help those affected by the COVID-19 outbreak (e.g., FIL-36-2020).

Due date extensions and deferred or skipped payments may be part of payment accommodations offered by loan accommodation programs.

In the wake of COVID-19, financial institutions will not be slammed for making responsible measures to accommodate their consumers.

As stated in the Interagency Statement on Loan Modifications for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) dated April 7, 2020 (the revised), “It has been agreed that short-term modifications due to COVID-19 for borrowers who were current before any loan modification will not be counted as TDRs.

Deferred payments, exemptions of fees and extensions of repayment terms are examples of short-term adjustments that aren’t considered significant.

Moreover, on the 27th of March, 2020, the “Loan modifications related to the COVID-19 pandemic that are made between March 1, 2020, and the earlier of the date 60 days after the end of the public health emergency or December 31, 2020, and if the underlying loan was not more than 30 days past due as of December 31, 2019, are exempt from TDR requirements under the new CARES Act.

Determining whether a financial institution has granted a concession

Only if the financial institution makes a concession that it wouldn’t otherwise make is a loan modification or restructure termed a TDR. According to accounting rules, a concession is given when the following conditions are met:

When a financial institution does not anticipate to recover all of the money it owes, including interest accrued at the original contract rate, it has granted a concession.
It is possible for a financial institution to offer concessions to a borrower in exchange for extra collateral or guarantees if those new collateral or guarantees do not adequately compensate for other terms of the restructuring.
Assuming that the borrower does not have access to funds at the market rate for debt of the same risk characteristics as the restructured debt, the restructuring would be regarded as a concession by the financial institution.
As stated in FIL36-2020, a deferred, extended, or renewed loan at a stated interest rate equivalent to the current interest rate for new debt with identical risk is not a TDR.
Because the new contractual interest rate on the restructured debt may still be lower than the market interest rate for new debt with similar risk characteristics, the restructuring may still be considered a concession even if the contractual interest rate rises temporarily or permanently as a result of the restructuring.

It is not a concession if a reorganization results in a small delay in payment. Restructuring may result in a small delay in payment if the following variables are taken into account:

Due to the small amount of the restructured payments, there will be a minimal gap in the contractual amount that must be paid by the debtors.
Restructured payment period delays are minimal compared to the frequency of payments due under the obligation, its original contractual maturity and/or the debt’s original planned term. The delay in payment period timing is insignificant.

Financial institutions will weigh the cumulative effect of earlier restructurings to determine whether or not the most recent restructuring has resulted in a minor delay in payment.

Determining whether a borrower is experiencing financial difficulties

If the borrower is in dire straits, a loan restructure or modification is only considered a TDR. The accounting guidelines state that a financial institution should take into account whether or not a borrower is suffering financial difficulties:

Any of the borrower’s debts are presently in default or are likely to go into default if the borrower does not receive the adjustment. In other words, the borrower may be having financial troubles even though the borrower has not yet defaulted on a loan payment.
An enormous amount of skepticism surrounds the borrower’s ability to continue as a business.
The financial institution projects that the borrower’s entity-specific cash flows will be insufficient to service any of its debt in compliance with the contractual conditions of the existing debt based on estimates and projections that solely encompass the borrower’s current capabilities.
For a non-troubled borrower, the effective interest rate on a similar loan would be equivalent to the current market rate if the borrower had not received the current modification.

A number of institutions are considering short-term relief programs that would be offered to all borrowers or all borrowers in a specific class. As stated in the Interagency Statement, financial institutions may choose not to account for loan modifications meant to provide temporary relief to Creditworthy borrowers affected by COVID-19 and fewer than 30 days past due on payments at December 31, 2019, as TDRs.

Accounting for troubled debt restructuring

Even if the loan was exempt from impaired loan accounting standards prior to restructuring, TDRs must be treated as impaired loans under ASC Topic 310-10. (for example, a residential loan that was evaluated collectively as part of a homogenous loan pool). Discounted cash flow is the most commonly used approach for determining TDR impairment. The institution assesses impairment using the discounted cash flow approach, which uses the original loan’s contractual interest rate to discount future cash flows coming from the modification. It is possible to calculate the discount rates using an independent index such as prime or LIBOR, which varies over the life of a loan, or it can be fixed at the rate that was in force at the time of the loan modification. In order to estimate future cash flows, the institution should not forecast changes in the index. Once a strategy has been selected, it must be applied consistently to all loans that have been deemed to be impaired.

Nonaccrual loans

A debt that has been adjusted in a TDR should not be regarded as non-accrual according to generally accepted accounting rules. For debts previously on a non-accrual status, regulators urge that they remain so until the borrower has shown that they can afford to repay the restructured loans. Even if the loan is on non-accrual, all TDRs are considered impaired loans and must be shown in the financial statements, even for real estate and consumer loans that normally aren’t assessed individually for impairment.

Unless new information emerges that indicates a specific loan will not be repaid, short-term loan modifications that are part of a program meant to help borrowers affected by COVID-19 should not be recorded as nonaccrual.

Delinquent loans

Loans that are 30 days or more overdue are often deemed delinquent. The Interagency Statement gives some further instructions for reporting outstanding loans awarded under COVID-19. In general, borrowers who were current prior to any payment deferrals or other accommodation would not be reported as past due, provided that they meet the performance requirements (if any) of the accommodation. Delinquency status may be restored to the date of the loan modification for borrowers who were past due on payments before getting COVID-19 loan modifications. Delinquent loans should be handled according to the unique facts and circumstances of each borrower’s case.

Concluding thoughts

While TDR accounting standards have not altered in recent years, their relevance has grown due to recent events and the current global context.

All staff involved in loan modifications and restructurings should be briefed on TDR-related instructions so that they are aware of the required accounting and disclosure of all TDRs.

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What are the three types of debt restructuring?

You may have to prioritize which bills you can afford to pay if your budget is already pushed thin. Due to late fees, creditors may confiscate any collateral used to secure the debt, such as a car loan, if you miss a payment. However, if you contact your creditors, they may be able to help you with debt relief.

In the event of a temporary financial hardship, you may be able to skip payments or avoid fees. Creditors may make an uncommon offer to renegotiate your loan agreement if you’ve previously been months behind on your payments. The term “troubled debt restructuring” is used to describe this process.

Credit card debt restructuring or loan restructuring on an installment loan can be done in a variety of ways, depending on your specific situation.

Types of debt restructuring

One example of debt restructuring is the modification of a homeowner’s mortgage loan. The debt could be reworked in a variety of ways, including:

adding the unpaid amount of a past-due bill to its principal balance

It’s possible that other lenders and credit card providers can help you avoid defaulting on the debt by offering similar types of debt restructuring options.

If you file for Chapter 13 bankruptcy, you can create a repayment plan that is approved by the court to pay back the debts you’ve included in the case. All of the obligations included in the repayment plans are discharged after a period of three to five years.

What is a debt modification?

Depending on the nature of the changes, debt modifications can either be accounted for as (1) a whole extinguishment of the existing debt and (2) a modification of the existing debt. The debt may be extinguished before its due date if the reporting body decides to do so.

What determines a TDR?

As a result of the many questions received from bankers and examiners about the accounting and reporting requirements for troubled debt restructurings, the Office of the Comptroller of the Currency (OCC) has issued this bulletin to national banks and federal savings associations (collectively, banks).

Accounting Principles Codification (ASC) Subtopic 310-40, “ReceivablesTroubled Debt Restructurings by Creditors,” sets down the accounting standards for TDRs. A list of previous references is included at the end of this bulletin for your convenience.

Recalling the FASB’s Accounting Standards Update (ASU) No. 201102, “Receivable: Creditor’s Determination of Whether Troubled Debt Restructuring,” banks should be aware of the FASB’s clarification.

The ASU can be applied to TDRs in accordance with the supplemental call report instructions2.

Background

When the economy is in turmoil, determining whether a loan renewal, extension, workout, or other adjustment constitutes a TDR becomes more difficult. Nonaccrual status was not satisfied for loans designated as substandard3 at the time of modification, and this is especially true for those loans. Considerations for appropriateness of accrual status and impairment evaluations are the subject of this advisory while considering loans for TDR classification. However, this bulletin does not represent a change in the law but rather an update on the key ideas for determining whether the loan modification is a TDR and the required reporting requirements for call report purposes. 4

automatically considered to be TDRs.”>I. All substandard loans on accrual status that are renewed, extended, or otherwise modified are not automatically considered to be TDRs.

Borrowers with substandard loans are presumed to be in financial difficulty because of the nature of these loans, which by definition contain specific flaws. The bank must document an appraisal of whether the borrower is in financial difficulty and whether the bank offered a concession that it would not otherwise consider as a result of the borrower’s financial issues when renewing or modifying loans. Given the expectation that a substandard borrower is in financial difficulty, the documentation for renewals, extensions, or adjustments that are not TDRs should be solid.

There is no additional underwriting when a substandard, accruing loan is renewed by a bank that does not change the loan pricing5 or adjust the pricing prior to the renewal to be commensurate with the risk, and the borrower provides no additional consideration to compensate for the increased risk because the borrower’s financial difficulties.
It is possible that a bank may not qualify as a TDR for the renewal of a substandard, accruing loan if it takes additional measures to reduce or mitigate the risk (such as adding collateral, new guarantors, or other risk mitigators) or adjust pricing to compensate for additional risk, after additional underwriting of the loan terms. To decide if a loan renewal or extension is a TDR, an evaluation of all relevant facts and circumstances must be undertaken.

This position is in accordance with ASU 201102’s TDR guidance. In the next paragraphs, you’ll find more information on the situation.

In exchange for extra collateral or assurances from the debtor, a creditor may restructure a loan. When new collateral or guarantees secured as part of a restructuring do not adequately compensate for other terms of the restructuring, a creditor has made a concession. During a restructuring, a business must consider both the guarantor’s ability to pay and its willingness to do so.

Creditors may offer a concession if the debtor does not have access to financing at a market rate for debts with similar risk characteristics as the restructured debt, which may suggest that the debtor is unable to meet its obligations. When assessing if a concession has been given, a creditor must take into account all components of the restructuring.

Accrual Status

To determine whether a loan is accruing or non-accumulating following a TDR, a number of elements must be taken into account. Such a loan’s accrual status is determined independently of the loan’s TDR study and determination, just like the risk rating process. Following call report instructions, a current and well-documented credit evaluation of the borrower’s financial condition and prospects for repayment must be performed in order to assess the likelihood that all principal and interest payments required under the modified agreement will be paid in full. Restructured loans’ accrual status should be based on the following considerations:

Assuming that the loan was properly on accrual status prior to restructuring, and if it has been successfully restructured, the bank’s credit evaluation shows that it is likely that the loan should remain on accrual status at this point in time, as long as the borrower is capable of making both principal and interest payments under the new terms. Prior to the date of the loan restructure, the borrower’s consistent previous repayment performance must be taken into account. Typically, a six-month term of payback performance would necessitate cash or currency equivalent payments.
As long as the bank’s credit examination shows that a borrower is capable of keeping up with restructured terms, but until the borrower has demonstrated an acceptable length of consistent repayment performance, the loan will likely stay on nonaccrual status. At the very least, this time period should be at least six months long (thereby providing reasonable assurance as to the ultimate collection of principal and interest in full under the modified terms). Pre-restructuring performance can be taken into account if it continues.

Impairment Measurement

“Troubled debt restructurings” are subject to ASC Subtopic 31010 impairment evaluation. Even though they may have been part of a pool that was examined by ASC Subtopic 45020 prior to their restructuring, these loans are included in this category (formerly known as FASB Statement No. 5). TDRs may have an associated ALLL after their restructuring, however this does not mean that all TDRs must be placed on or remain on non-accrual status. Accrual status is available for TDRs that match the guidance above, either during restructuring or at a later point. It is generally not appropriate for an impairment estimate on a loan previously considered individually impaired to decline as a result of the change from the ASC Subtopic 45020 to the methods prescribed in ASC Subtopic 31010, unless a partial charge-off6 for the portion of the loan identified as uncollectible at the time of the restructuring is made.

Impairment should be measured using either a present value technique (i.e., discounting future cash flows at the loan’s original effective interest rate) or an observable market price for a non-collateralized TDR, as per ASC Subtopic 31010 and call report instructions. If a loan is collateral dependent, the fair value of the collateral should be used to measure the loan’s impairment for call reporting purposes. If the costs to sell the collateral are expected to reduce the cash flows available to repay or otherwise satisfy the loan, the fair value of the collateral should be used.

An individual TDR’s ASC Subtopic 31010 impairment measurement should take into account all historical occurrences, including the bank’s ASC Subtopic 45020 impairment estimate for similar types of loans. When creating an impairment estimate for a TDR, current market conditions should also be taken into account, using the proper measuring method (present value of expected future cash flows, fair value of collateral or observable market price). It would take into account all relevant “environmental elements,” such as industry, geographical location and economic and political circumstances that could affect the loan’s capacity to be collected.

Consider whether it is reasonable to employ default and prepayment assumptions that would be relevant to an aggregated pool of loans with similar risk characteristics when computing predicted future cash flows for individual TDRs. At the individual loan level, it’s the goal of this calculation to come up with the most accurate estimate of the predicted cash flows. The bank’s computation should take into account the fact that the borrower’s financial troubles persist following the adjustment of a TDR.

TDRs may be aggregated and measured for impairment in accordance with ASC Subtopic 31010 by using historical information, such as average recovery period and average amount recovered, together with a composite effective interest rate. An aggregation approach, on the other hand, should yield an impairment measurement that is similar to that recommended in ASC Subtopic 31010 for loans that are assessed to be impaired on a one-to-one basis.

III. Once a TDR, always a TDR?

The loan must be reported as a TDR until it is paid in full or otherwise settled, sold, or charged off. If a loan must be reported as a TDR in order to continue being examined under ASC Subtopic 310-10, a different analysis must be conducted.

If an interest rate is consistent with market rates at the time of the restructuring (for example, in an A/B note split structure) and the modified terms of the loan are in compliance, the loan should no longer be reported as a TDR in calendar years following the year in which it was restructured, as per ASC Subtopics 310105015(a) and 310105015(a) (c). TDR loans must be in accrual status and current or less than 30 days past due under the adjusted repayment conditions to be deemed in compliance for call reporting purposes. It is not necessary to continue disclosing TDRs in the call report for loans that fulfill these criteria, but these loans will continue to be assessed under ASC Subtopic 31010, as mentioned above.

Additional Considerations

It is important for banks to clearly document their TDR screening processes. Examples include flagging or renewing a loan for review, considering factors to determine TDR status and assigning responsibilities for making a decision on the status of TDRs. It is important for banks to clearly document and substantiate each adjustment or renewal as well as their conclusions.

Financial institutions may find the “Policy Statement on Prudent Commercial Real Estate Workouts,” as well as the “Bank Accounting Advisory Series,” useful in their consideration of TDRs in loan modifications and renewals.

IV. How will loans designated as TDRs be analyzed?

Loan modifications that are classified as TDRs (i.e., do all TDRs have a higher level credit risk than non-TDR loans) are a prevalent question from examiners, bankers, and other consumers of financial statements and call reports. For this reason, the TDR classification cannot be relied upon as an accurate indicator of the risk associated with a loan. Those TDR disclosures in the call report that distinguish between those TDRs on accrual status and in compliance with their modified terms (included in Schedule RCC, Part I of Memorandum, Item 1) and those TDRs on nonaccrual and/or not in compliance with their modified terms (Schedule RCN, Memorandum Item 1) should be taken into account. Due to the nature of this memorandum item’s subset of past-due and non-accrual loans, it should not be tallied twice when examining the data in this schedule.

How do I cancel debt restructuring?

According to the South Gauteng High Court decision in Rougier v. Nedbank, 27333/2010, any act by a debt counsellor to terminate or withdraw debt review is a violation of a debt counsellor’s statutory powers.

The NCR issued its Withdrawal from Debt Review Guidelines on February 25, 2016, as a result of this judgment. When a debt counselor issued Form 17.4 prior to this date, consumers had the option of requesting the Form 17.4 from their debt counselor or having the debt counselor issue the Form 17.4. There was a voluntary cancellation of the debt review process once the Form 17.4 was issued by the consumer or the debt counsellor.

The Form 17.4 has been replaced by the Form 17.W as a result of the Rougier v Nedbank judgement. Debt review can only be terminated under the following conditions:
NCR’s Debt Help System has informed the credit bureaus that a customer has opted out of the debt review procedure before the issuing of Form 17.2.
The consumer has refused to cooperate with the debt counselor, hence the service has been halted. The debt counselor is still listed as the debt counselor on the client’s records.
The debt review order has been rescinded by a court order. The NCR Debt Help System has provided updated information to credit bureaus.
It has been ruled that the consumer is no longer over-indebted by a court of law. The NCR Debt Help System has updated the credit bureaus.

If only points a through d were met, the debt review procedure would be completed and the debt review indicator would be removed from the consumer’s credit report. Consequently, after a consumer’s debt review application is accepted and a Form 17.2 is produced, this information will be included in their credit report for future reference. According to the NCR’s Withdrawal from Debt Review Guidelines, the only way to end the debt review process unless all of the accounts are paid up or the consumer becomes entitled to a clearance certificate is to apply to the court to either rescission of the debt review order if one was obtained, or for a determination that the consumer is no longer over-indebted.

Is debt restructuring a default?

Estate planning, inheritance, wills, and more are all covered here.) How to file an ITR for FY 2020-21, and all you need to know about it The procedure of debt restructuring is employed by organizations in financial trouble to avert the possibility of default.

Can you remove a loan from TDR status?

Accounting Bulletin No. 14-1, dated September 30, 2014, by the National Credit Union Administration (NCUA), outlines changes to the reporting criteria for amended loans designated as Troubled Debt Restructuring (TDRs) (TDRs).

According to an interagency regulatory reporting policy, a Troubled Debt Restructuring Restructuring Bulletin was issued.

Previously, ASC Subtopic 310-30, Receivables said, “Once a TDR, always a TDR.” The new guideline gives an exemption to this criterion (formerly FAS 114). The updated bulletin states that if a debt is restructured and meets all of the following requirements, it can be removed from TDR status.

The borrower is no longer in financial distress at the time of the subsequent restructuring; and
Restructuring terms will be comparable to market interest rates for new debt with comparable credit risk characteristics; and.
No concessions should be allowed because the terms offered are no less beneficial to the institution than those it would offer for a new debt.

That’s the most crucial issue here: The institution’s TDR loan needs an overhaul, and it needs an overhaul that mirrors what it offers on newly created loans of the same type and quality. Despite the fact that the loan’s modification deadline has ended, it cannot be removed from TDR status because the loan is still performing as expected. A credit review should be carried out and documented at the time of the following restructuring. The credit union no longer needs to set up a particular lifetime loss reserve for the loan if the later restructuring meets all three of the standards outlined in this paragraph. For the purposes of determining the allowance for loan losses, the loan can be removed from TDR status and placed in the ordinary loan pool.

Credit unions must take into account any principal forgiveness when determining whether a concession has been granted. If the first two conditions are met, loans with prior principle forgiveness will stay in TDR status, even if they meet the second.

As of September 30, 2014, the National Credit Union Administration (NCUA) has approved this guidance for use in the future. Any previously restructured debts that fulfill these standards can also benefit from this new guidance.

Are TDR loans impaired?

According to GAAP, a troubled debt restructuring is one in which a credit union or other financial institution makes a concession to a borrower who is having financial difficulties that the credit union would not have otherwise considered because of economic or legal reasons associated with a borrower’s financial difficulties. This concession is made to the borrower. Credit unions are required to assess the loan’s impairment on a regular basis, which might be difficult.

The October 2013 interagency advice “Addressing Certain Issues Related to Troubled Debt Restructurings” will help us better appreciate this principle. This guidance focuses on TDR impairment classification and determination. We’ll go into more detail on collateral-dependent TDRs and their charge-off treatment in the next section.

Any loan that has been altered through a TDR is considered impaired, and as a result, it must be examined to determine whether or not it is dependent on collateral. If repayment of the impaired loan is entirely dependent on the underlying collateral, such as the sale proceeds, cash flows from the continuous operation of the collateral, or a combination of the two, the loan is said to be collateral-dependent.

If all other sources of cash flow are exhausted, repayment of an impaired loan is typically expected to be covered only by the sale or continuous operation of the collateral. If the borrower has additional sources of cash flow to cover the debt service, the loan may not be collateral-dependent.

As long as the loan’s observable market price or effective interest rate is known, impairment is calculated using a discount rate of the loan’s estimated future cash flows discounted to the original effective interest rate.

Loans with and without collateral have distinct impairment and charge-off treatment options. Let’s take a closer look at each component.

Are all TDR loans impaired?

In accordance with ASC 310-10, all TDRs should be examined for impairment. Modification of terms frequently results in an already impaired debt being restructured, which would have been reviewed for impairment prior to the restructuring.