The benefits of a debt workout rather than bankruptcy

When faced with debts you can’t pay, bankruptcy often seems like the only course of action. To be sure, bankruptcy is an excellent option to help you get out from under the crushing weight of debt. But there are other options.

One is a mutually negotiated debt modification with one or more creditors. The exercise is usually called a “loan workout.” It’s based on the idea that creditors would rather keep you a loyal, paying customer than turn your debt over to a collector, and will be willing to work out a repayment schedule with you. They may even be willing to accept a lower total amount if they believe getting a payment from you is better than sharing with your other creditors during a bankruptcy.

What is a workout?

There are two kinds of workouts, compositions and extensions.

  • A composition is a contract between the debtor and creditors where creditors will accept a smaller payment
  • An extension is a contract between the debtor and creditors where creditors agree to extend the payment schedule

Creditors may agree to compositions, extensions or a combination of both rather than work with you in bankruptcy since in bankruptcy, a majority of creditors can determine the payback schedule against dissenting creditors wishes.

Different type of creditors

Student loans: These companies are difficult to negotiate debt with, so your best course of action is to take advantage of any government-sponsored programs that allow you to adjust the amount or schedule of debt repayment.

Mortgage companies: Home loan modifications are possible through your bank or mortgage lender. They can go a long way toward easing your debt problems.

Credit card companies: These companies are usually the most open to renegotiating debt, although it usually takes time to negotiate a settlement both you and the credit card company find acceptable.