Although bankruptcy protection under Chapters 7, 11, and 13 can be very powerful tools to eliminate debt, they are not always the best option for individuals or businesses to resolve financial issues. However, unlike the requirements imposed between debtors and creditors under the Bankruptcy Code regarding ongoing payments or repayment plans, many of these alternatives are voluntary agreements between the parties. Because these alternatives are typically voluntary, it is usually advised to hire an attorney to act as an aggressive negotiator to get the best possible alternative payment arrangement.
Workout Agreements
A workout agreement can be any type of voluntary arrangement between a borrower and a creditor that differs from the underlying contract. For example, if a borrower were to fall behind on a credit card, the underlying credit card agreement may call for default interest of 15 to 20% or more. Under a workout agreement, the credit card company may agree to waive some or all of the default interest if the borrower becomes current on missed payments within a reasonable period of time.
Workout agreements are often well suited for businesses that have disputes with a lender of a commercial line of credit and/or a lender that has a security interest in equipment or accounts receivables. Under these circumstances, a business may be faced with either working out an agreement with a commercial lender or filing for bankruptcy protection to maintain operations. A workout agreement may be mutually beneficial for both parties because if the business can continue to operate and thrive, than the lender may receive more funds than they would otherwise get if the business were forced into bankruptcy or to liquidate.
Workout agreements can be used to:
- Reduce interest rates
- Prevent an eviction from either a residential or commercial property
- Prevent repossession of a vehicle or business equipment
Forbearance Agreements
Forbearance agreements can be used to:
- Prevent an eviction from either a residential or commercial property
- Prevent repossession of a vehicle or business equipment
Forbearance agreements are any type of agreement between a lender and borrower or landlord and tenant where the lender or landlord forgoes its right to act upon the default of a borrower or tenant and typically provides for additional time to allow the borrower or tenant to become current on missed payments. For example, most leases indicate that if a default is not cured within a certain period of time then the lease can be deemed terminated and a tenant can be evicted or equipment can be repossessed as a result of the default. Under a forbearance agreement, the landlord or lender may agree not to enforce its rights to evict or repossess property as long as a tenant or borrower becomes current within a certain period of time. Forbearance agreements may work particularly well for residential or commercial leases where a tenant had a temporary cash flow issue that has subsequently been resolved but needs additional time to become current on the lease.
Debt Settlement or Negotiation
Debt settlement can be used to:
- Pay back less than the total debt owed
- Reduce default interest
It is often best suited for:
- Individuals with only a small number of unsecured creditors
- Individuals who have access to lump sums of funds available to pay back creditors
Debt settlement or debt negotiation may often allow borrowers to pay back less than the total amount owed on a particular debt such as a credit card or medical bills, typically in a lump sum, in exchange for a satisfaction of the remainder of that debt. It is typically more effective for unsecured debt such as credit cards rather than secured debt such as a home mortgage. For example, a borrower that is in default on a credit card may be able to offer a creditor a lump sum of 25% to 50% of the outstanding debt in exchange for a satisfaction of the remainder of the debt owed. Once an individual settles a credit card, however, the lender almost always cancels the account so that it can be no longer used by the borrower. Factors that may impact the success of debt settlement negotiations include the age of the debt, the total amount of the debt, whether or not the debt is secured, and the total assets owned by the borrower.
The list above represents only a portion of the bankruptcy alternatives offered by Shevitz Law Firm. Borrowers should speak with an attorney immediately upon falling behind or defaulting on payments to discuss possible options for resolving their financial issues.
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