Glossary Terms

Extinguishment of Debt

Extinguishment of Debt
Reviewed by Minh Tong
Updated February 14, 2023

Extinguishment of debt refers to the termination or cancellation of a debt obligation. 

This means that the borrower is no longer obligated to repay the debt, and the lender no longer has a claim on the borrower’s assets or future earnings. Debt extinguishment can happen in several ways, including: debt forgiveness, debt restructuring, debt buyback, and debt write-off.

Debt forgiveness occurs when the lender agrees to cancel a portion or all of the debt owed by the borrower. This is often done as a form of aid to countries or individuals who are unable to repay their debts due to economic or financial difficulties. Debt forgiveness can also be offered as part of a settlement agreement between the borrower and the lender, where the lender agrees to forgive a portion of the debt in exchange for the borrower agreeing to certain conditions.

Debt restructuring is a process in which the terms of a debt obligation are renegotiated to make it more manageable for the borrower to repay. This can involve extending the repayment period, reducing the interest rate, or converting a portion of the debt into equity. Debt restructuring is often used as a way to avoid default or bankruptcy, and can be beneficial for both the borrower and the lender.

Debt buyback occurs when the borrower repurchases some or all of its outstanding debt at a discount to the face value of the debt. This is often done to reduce the overall debt burden and to improve the borrower’s financial position. Debt buybacks can also be used by lenders to dispose of non-performing loans and to reduce their risk exposure.

Debt write-off, also known as debt forgiveness, occurs when the lender removes the debt from its books and no longer considers it collectible. This typically happens when the borrower has defaulted on the debt and has no ability to repay it. Debt write-offs are often used by lenders as a way to reduce their losses and to manage their risk exposure.