What are Workouts?
Non-bankruptcy workouts are an alternative to a bankruptcy filing where a debtor and creditors reach an agreement between themselves for the payment of the debts. In 2005 congress passed far-reaching changes in America’s bankruptcy statutes that resulted in it being much more difficult for a debtor to successfully file for bankruptcy, and the increasing popularity of non-judicial solutions has been the result. Workouts are typically far simpler than a bankruptcy filing and can often be accomplished more quickly. Workouts are essentially contracts, following the principles of contract laws: they are voluntary agreements that the parties enter into, and because of this they can be even broader than bankruptcy protection. However this can also be an issue during negotiations: since all parties have to agree to the terms, any given creditor can choose not to participate, or leave the negotiations at any time prior to signing, and has the right to continue to pursue recovery through debtor-creditor rules instead; in a bankruptcy proceeding the bankruptcy court has the ability to bind all the debtor’s creditors to an agreement. Workouts generally will impact a debtor’s credit much less than a bankruptcy filing and are often cheaper because they avoid many of the fees associated with a bankruptcy proceeding.
When considering a workout, timing can be important. While it is always possible to attempt negotiations with creditors, choosing to do so before defaults have occurred provides a debtor with a stronger position to negotiate from, which will result in a more advantageous eventual outcome. Because of this it is in a debtor’s best financial interests to discuss the possibility of a workout with an attorney at the earliest possible opportunity—your ability to negotiate will very likely only get worse as time passes, and in negotiations it is important to seek the highest possible position from which to bargain.
Types of Workouts
Workouts generally fall into two categories:
- Compositions—consist of a contract between a debtor and several creditors wherein the creditors agree to some degree of partial payment to settle their claims.
- Extensions—consist of a contract between a debtor and several creditors wherein the creditors agree to extend the time the debtor has to pay the debts owed.
Workouts will also sometimes include both categories as the parties may deem necessary and appropriate. Since workouts are actually contracts, there is a lot of leeway for negotiating exact terms, and thus specifics will depend on the specific situation and the parties involved.
Discuss Your Options with a Debt Solutions Attorney
With the current environment of America’s bankruptcy statutes, non-judicial debt relief solutions have gained rapid popularity. If you are considering a bankruptcy filing as a debt relief solution a workout contract might be a viable alternative that offers benefits that would not be otherwise available in your situation. Our experienced staff is ready to discuss your options with you at your convenience, but the sooner you contact us the better your potential results.
Marshack Hays LLP has been successful in structuring out of court workouts for retail stores and service industries. We recently completed a workout with employees who filed a class action wage claim proceeding. In each instance, the businesses remained open, employees kept their jobs, and creditors were paid a discounted amount over time. The debtor/business paid less than 33% of what a Chapter 11 filing would have cost.