Nonbankruptcy Workouts

The term "workout" is used to describe a non-bankruptcy negotiated modification of debt. More simply stated, a workout is an agreement worked out between a debtor and his or her creditors for repayment of the debts between them, which is negotiated without all the procedural complications-and perhaps the stigma-of the bankruptcy process. Lawyers experienced in bankruptcy and debtor-creditor law can advise both debtors and creditors on whether a non-bankruptcy workout may be their best course of action.

Compositions And Extensions

Workouts are also sometimes called compositions or extensions. A "composition" is a contract between the debtor and two or more creditors in which the creditors agree to take a partial payment in full satisfaction of their claims. An "extension," by contrast, is a contract between the debtor and two or more creditors in which the creditors agree to extend the time for payment of their claims. An agreement may be both a composition and an extension-in other words, an agreement to accept less money over a longer period of time.

The same laws govern both compositions and extensions. Both are subject more to contract law principles than debtor-creditor rules. Thus, compositions and extensions must satisfy all formal requirements of contract formation, which can vary from state to state, but most of the basic principles are constant whichever state you're in. There must be an offer to make a contract, the offer must be accepted, and there must be "consideration," or something or value exchanged between the parties.

While more than one creditor must enter into the workout agreement, there is no requirement that all of the debtor's creditors agree to its terms. Creditors that do not agree to the workout are not affected by it and remain entitled to pursue other remedies to collect the debts owed to them. Although they can theoretically proceed to recover the full amount due, they are forfeiting the right to automatically benefit from whatever partial payment the composition would have allowed had they taken part.

Why Choose A Workout?

There are a variety of reasons why a debtor might prefer a workout to bankruptcy. By entering into a voluntary agreement with creditors, the debtor avoids the stigma that attaches to bankruptcy but achieves the same results-discharge from all or a portion of his or her debts. In fact, a workout discharge can be even broader than a bankruptcy discharge. Also, a workout discharge does not affect the debtor's rights to file a future bankruptcy, whereas certain types of bankruptcy discharges do. But the main advantage of a workout is that it is voluntarily entered into by both the debtor and the participating creditors. In a workout, unlike bankruptcy, the majority of creditors cannot cram down concessions on dissenting creditors. All of the participating creditors must agree to the workout's terms.

Conclusion

In some circumstances, however, a debtor is afforded greater protection by a formal bankruptcy, and attempting a workout may just prolong the financial agony and delay the inevitable. An attorney experienced in bankruptcy and debtor-creditor law can help debtors and creditors alike determine whether a workout may be the best option for debt repayment, or whether bankruptcy is the better choice in their particular circumstances.