Loan Workouts and Dealing with Creditors Informally
If your financial problems are only temporary, you can ask creditors to accept lower payments or request that payments be scheduled over a longer amount of time.
Creditors may be more receptive to modifying your debt or repayment if you have been a prompt payer in the past or if they wish to avoid resorting to a court proceeding to collect on the debt.
Creditor Actions: Wage Garnishment
Sometimes, your efforts to become debt-free are not fast enough for creditors.
In most situations, a creditor has to take you to court and obtain a judgment against you before garnishing up to 25% of your wages. Even if that happens, you can contest it, arguing that you cannot survive on what is left of your paycheck.
There are three situations in which your wages can be garnished without a court proceeding (though you still need to be notified):
- The IRS can garnish your wages without a court order. You have a 30-day window in which to challenge the wage garnishment.
- If you have student loans in default, the Department of Education (DOE) can garnish up to 15% of your wages. A state agency can also garnish up to 10% of your wages.
- If you have failed to pay alimony or child support, up to 50% of your wages may be garnished.
Creditor Actions: Liens on Property and Asset Seizure
A creditor may also want to put a lien on your property or attempt to take money directly from your bank account.
Apart from the IRS, most creditors must go through court to take these actions.
Creditor Actions: Taking Tax Refunds
Your tax refund cannot be taken unless the Treasury Department receives a request from the IRS, DOE, or a child support collection agency.
None of these actions are ideal, so dealing with creditors informally can be a key decision.
The term "loan workout" is used to describe a more formal, mutually-negotiated modification of debt. It does not involve a bankruptcy filing.
Simply stated, a workout is an agreement worked out between you and your creditors for payment of the debts. The agreement is negotiated without all the bells and whistles of the bankruptcy process.
Workouts are sometimes called "compositions" or "extensions":
- A composition is a contract between you and two or more creditors where the creditors agree to take a partial payment of the debt. Their claim is satisfied by this, and the debt is gone.
- An extension is a contract between you and two or more creditors where the creditors agree to extend the time for payment of the debt.
An agreement can be both a composition and an extension. It could also just be an agreement to accept less money over a longer period. The same laws govern both compositions and extensions. Both are subject more to contract law principles than debtor-creditor rules.
A workout discharge of your debt is even broader than a bankruptcy discharge. It does not affect your rights to file a future bankruptcy claim.
The main advantage of a workout is that it is voluntary. In a workout, the majority of creditors cannot cram down concessions on dissenting creditors.
Loan Workouts: Effect on Creditors
More than one creditor must enter into the workout agreement, but there is no requirement that all creditors agree to its terms.
Creditors that do not agree to the workout are not affected by it. In other words, they are entitled to pursue other remedies to collect the debts owed to them. Sometimes, creditors can disagree about the terms of the workout agreement and try to recover their debt in full. But, they are forfeiting the right to automatically benefit from whatever partial payment you offered. Debtors are at the mercy of the creditors for non-bankruptcy workouts to be a success.
Another potential downside is after a creditor and debtor plan a non-bankruptcy workout, the creditor could always have a change of heart and not abide by the terms of the agreement.
Credit Counseling Organizations
Consumer credit counselors also can help work out a repayment plan for you. But some so-called "credit counselors" prey on overwhelmed consumers and promise "a clean slate" (often for a flat, up-front fee).
They may promise to contact creditors and convince them to accept lower payments or charge lower fees and interest rates. In many cases, the only ones who end up in better financial shape due to these "efforts" are the counseling organizations themselves. Many people are left with even fewer resources as a result of high fees and more unpaid debts.
Ask an Attorney About Repayment Options
If you are unsure about which options are right for you, asking an attorney about repayment vs. bankruptcy is a smart first step. Your options may be limited by your situation or the law.