A loan consolidation is a rescheduling. This is done to reduce the burden of multiple loans and credits and to allow a common rate for all liabilities. Credit consolidation is possible for consumers and businesses. In the context of ongoing insolvency proceedings, it is often part of a company rescue or liquidation. Credit consolidation is subject to different legal frameworks for businesses and consumers, with consumers being far more reluctant to discharge their obligations. However, in both cases, credit consolidation must be negotiated with the creditors, as they transfer their claims to the lender, who in turn often provides security for them.
The loan consolidation for the consumer
The consumer has the possibility to carry out a loan consolidation as part of his private bankruptcy. The aim of this consolidation is to give the consumer the freedom to repay his debts and to avoid payment bottlenecks. As part of bankruptcy proceedings, credit consolidation is usually ordered by the competent insolvency administrator. For the consumer, this has clear advantages, because current and outstanding claims, reminder amounts and interest are combined under one loan. If this consolidation is possible, then the consumer can not hope for a waiver of claims by the creditors later, but has the opportunity to significantly reduce the total amount of claims. Should he also culpably fall into arrears with the payments, he still has the opportunity to talk to the creditors again and find a common solution.
Only in the context of this step is a debt waiver on the part of the creditors conceivable, here, however, the consumer must prove that he is not culpably abducted the bankruptcy and advised by intention in the delay of the payments. In most cases, existing lenders offer the consumer quite favorable conditions for loan consolidation in the context of bankruptcy proceedings, as they have a more realistic chance of repaying all outstanding claims. Frequently, these offers also include much cheaper interest rates than the previous contracts, and the consumer has the opportunity to adjust the rates according to his income.
Nevertheless, the consumer must prove to the creditors exactly what collateral he can provide and what income he will have and dispose of. This is often a problem, especially for self-employed people without fixed incomes, because the motivation to increase their earnings often increases significantly after taking up insolvency proceedings. However, consolidation is preferable to a waiver of claims, as it allows consumers to return to a higher credit rating and cash. During the repayment of the consolidation loan, however, it is rarely allowed to take out another loan and the credit rating drops significantly.
The loan consolidation for companies
For companies, insolvency law stipulates a significantly different framework for loan consolidation than for a consumer. The legal regulations are also not found in the BGB, but are defined in the HGB and in corporate law. Depending on the form of the company, the procedure remains roughly the same, but must be discussed with different parties. At the beginning is the application for bankruptcy, which must be received in due time by the competent district court. Basically, a distinction should be made here between a consolidation of a loan due to insolvency and a consolidation for economic reasons.
Although both are usually considered in the event of financial constraints, they will inevitably need to be discussed with the bankruptcy trustee, creditors and shareholders in bankruptcy proceedings. A possible but not attempted loan consolidation can also be the offense of bankruptcy, which is why this step is usually one of the final financing instruments for companies. But credit consolidation is problematic in that it severely restricts the company’s financial scope. For example, in the case of a supplier loan, a reduction or dissolution of the credit line due to the consolidation can result in irreparable damage.
Also, the impact on creditworthiness and the associated additional costs of taking out new loans can potentially cause great harm to the company. Communicating with shareholders is often an insurmountable obstacle. Although the company management only has to consider the vote of the creditors in the context of a bankruptcy, it must report it to the shareholders if they are admitted outside the procedure.
If it does, it often has a negative impact as stakeholders worry about their stakes. Possible consequences include a sharply falling stock price, an increased risk of hostile takeover by lack of liquidity, weak corporate governance and a generally negative sentiment, which can also affect customers and other suppliers. In international trade, a consolidation loan is not only an obstacle, but also a common cause of lawsuits and massive problems.
For this reason, a contract for protection is almost always agreed in international contracts. In this, it is determined according to which jurisdiction any arising difficulties must be solved. If this clause is not agreed, the case law of the plaintiff always applies. Exceptions are lawsuits before international courts. Nevertheless, loan consolidation with international suppliers and creditors is often very complex and, depending on the political situation, a risky venture for a company. Especially in countries that are not part of the EU or a free trade zone, payment barriers can quickly become a political issue and adversely affect the relationships and the company’s success.