Debt/Workout FAQ

Q. I am in debt over my head. Bill collectors call all day. Do I have to file bankruptcy?

A. No! Consider a debt workout instead of bankruptcy whenever possible.

Q. What is a debt workout?

A. Generally this occurs when you contact your creditors and make arrangements which would require you to make some payments to them, although less than what they may be owed to settle the account in full. Other times arrangements call for payment in full but over a longer period of time than originally planned. Sometimes you can even pay a smaller settlement figure and make payments over time.

Q. Why would creditors do this?

A. Most debtors in workouts classify as candidates for loan defaults or bankruptcy. If either should occur the creditors would likely end up with little or nothing. By doing a workout they get more than they otherwise would.

Q. Do I need an Attorney to do a workout?

A. No. A workout can be performed by anyone with experience in filing workouts. But make you select someone with experience and someone who is working on your behalf.

Q. What should I watch for?

A. Many lawyers will have you quickly file for bankruptcy without attempting to fully understand your financial or lifestyle situation. Make sure someone takes the time to understand you and your needs. Then explore all the options including bankruptcy, paying creditors in full or doing a debt workout.

Q. What makes a workout better for me?

A. A bankruptcy remains on your credit file for 10 years and may have to be reported on financial statements even longer. A workout allows you to avoid the emotional and credit scars caused by bankruptcy. For those with hard assets such as real property, a workout allows them to retain greater control and increase the likelihood you may keep your assets if that is your wish. Workouts even help to keep or control soft assets such as cash.

Q. I’ve missed my mortgage payments and a foreclosure letter has arrived, what can I do?

A. Many ways exist to keep you property through a workout. A workout for someone only a few months behind bares more chance of success. Below is a list of several ways to save your property.

Short pay or short refinance. In most situations you accomplish this through a refinance. For example: You owe $90,000 on your mortgage with another $9,000 in arrearage and legal fees. You negotiate for the loan to be settled for $85,000 and arrange a new $90,000 loan to cover paying off the original loan and all associated fees. You have now avoided the foreclosure and eliminated $9,000 in debt. This is assuming you have enough equity in the property.
Modify the existing mortgage. Ask the mortgagor to change the terms of the loan. Most often the changes are temporary. Request a deduction in principal and interest or extending the payment schedule.
Repayment Plan. Present a plan that is easy to understand and easy for creditors’ to accept. Offer to pay a portion of the arrearage and agree to pay the rest in addition to the regular payment over a period of months.
Sale Lease Back. Offer to sale the property to an investor with an option to lease with an option to repurchase the property in the future.
Q. What is a deficiency judgment?

A. When you sign a promissory not to pay a creditor, you agree to repay a specific amount. If your home is foreclosed or your automobile is repossessed and the creditor sale the property for less than what is owed, they will file a deficiency judgment to make up for the loss. For example, you owed $85,000 when your home was foreclosed, and the mortgage resold the property for $75,000. They will file for a deficiency of $10,000 plus court cost. Then the deficiency becomes unsecured debt.

Q. Can unsecured debt be worked out?

A. Yes. By paying it off in cash at a discount or establishing a long-term payoff plan.

Q. Will creditors accept less than I owe?

A. Yes. Creditors objective is get cash so they can operate. Their attitude is something is better than nothing.

Q. What if I just can’t get cash to work with?

A. Then the solution is to keep your creditors informed to what’s going on.

Q. Why would creditors do a workout?

A. “Time value of money” is very important to a creditor. A smaller amount in their pocket today has greater value than a larger sum year down the road. Settlements may also avoid steep legal fees.

Remember, you can resolve almost any financial problem. But you must have a plan.