What Is a Loan Workout?

A loan workout is a modification of loan terms negotiated by a debtor and creditor in order to keep the loan in good standing. Typically, a workout involves changes in loan repayment, which may include allowing a debtor to make up missed payments, offering the debtor a more favorable interest rate, or extending the payback so as to lower monthly payments. The loan workout process typically involves both the debtor and creditor working together to develop a plan that will enable the debtor to meet his obligations while not causing him any undue hardship. Creditors may be motivated to offer concessions and loan repayment in order to maintain a good relationship with the debtor and to avoid pushing her into bankruptcy.

Many debtors take on loans with every intention of meeting the terms of their repayment agreement. Changes in personal circumstances and the economy can sometimes make it very difficult for someone to meet his scheduled loan payments, however. As the consequences of not repaying the loan can be dire and may include foreclosure, lawsuits, and significant damage to the debtor's credit, many debtors may seek a loan workout so that they can continue making payments. For creditors, such an agreement can be the difference between eventually getting paid the money they are owed and potentially getting nothing if the debtor files for bankruptcy.

The loan workout process varies by lender, but may include a comprehensive evaluation of a debtor's financial situation. The creditor typically will want to see evidence of a legitimate financial hardship along with an indication that the borrower will be able to eventually get back on track. A debtor, on the other hand, may need to be persuaded that repayment of the loan will cause him less distress and financial harm in the long run than filing for bankruptcy. In a successful loan workout, the borrower's circumstances are taken into consideration, so the actual plan may differ considerably from debtor to debtor.

In some loan workouts, the debtor may have experienced a period of financial difficulty and may simply need a chance to catch up with payments. In such cases, a creditor may offer the debtor the option of having her missed payments added to the principal of the loan or may simply grant her a forbearance during which she does not have to make any payments. If the debtor's financial situation does not appear to be improvable in the near future, the creditor may agree to a workout in which the debtor's payments are reduced, creating less of a burden on the debtor's cash flow. In either case, the creditor is generally not obligated to offer these concessions and may decide not to go forward with a loan workout if it determines that doing so is not in its best interests.