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Debtor and Creditor Workout New Mexico, Part 1
What is a debtor and creditor workout and when is it a good alternative to bankruptcy?
What is a debtor and creditor workout?
A debtor and creditor workout is a written agreement modifying the terms of repayment on a debt. Also called non-bankruptcy workouts, a debtor and creditor workout can provide debt relief in two ways: through compositions and extensions.
- Compositions – in a composition, a creditor or creditors agree to accept partial repayment of a debt, and, in exchange, to forgive the full amount of the debt.
- Extensions – an extension simply gives a debtor more time to pay off a debt. However, an extension can still result in a debtor having more cash on hand, since a loan’s payment amount will drop when its term is extended.
The final agreement between a debtor and their creditors may consist of either compositions or extensions, or it may contain both.
Advantages of a debtor and creditor workout
- A non-bankruptcy workout is a less formal process than bankruptcy. This generally means fewer costs and fees.
- A non-bankruptcy workout avoids the stigma some people have around the idea of bankruptcy, as well as the credit score damage.
- A debtor and creditor workout does not affect the future possibility of bankruptcy, so if the agreement doesn’t work that option is still on the table.
Since rules governing workouts are more flexible, the discharge of debt from a workout can in some cases be even greater than the discharge from a bankruptcy filing.
Disadvantages of a debtor and creditor workout
The voluntary nature of a non-bankruptcy workout cuts both ways – if any of the creditors don’t like the terms of the agreement, they are free to walk away and pursue full repayment of their debt. However, if the debtor is likely going into bankruptcy should the workout fail, the creditor may not have any reason to expect a full repayment. In this case, it would be in the creditor’s best interests to stay at the table even if it means accepting a partial payment.
Check back soon for Debtor and Creditor Workouts in New Mexico, Part 2