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What Options Does a Debtor Have Short of Bankruptcy?


Before making the decision to file for bankruptcy, a debtor should thoroughly consider other possible options. After all, bankruptcy can narrow future options by negatively influencing credit ratings and employment opportunities. Sometimes a viable alternative for handling problematic debt can be accomplished through informal negotiation or contractual agreement.

Informal Negotiation

The easiest resolution for a thorny financial obligation may be for the consumer to simply approach the creditor and suggest creative new terms that would enable the consumer to continue payment at some level. For example, the creditor may agree to accept lower payments either temporarily or permanently; extend the term of the repayment period; or temporarily suspend principal payments and accept interest payments only. Such renegotiation may be advantageous to the creditor as well as to the debtor. The business relationship will be preserved and the creditor may actually save money in the long run by avoiding the need to take expensive legal action.

Consumer-credit counseling services may be of value to consumers in such situations. Beware, however, of the unscrupulous credit organization that promises more than it can deliver.


The term workout is often used to describe a more formal, mutually negotiated modification of the debt agreement that does not involve a bankruptcy filing. Simply stated, a workout is a revised debt agreement worked out between the debtor and his or her creditor or creditors, usually by restructuring the payments in some fashion or even by discharging part or all of the debt. Workouts can require long negotiation, often requiring compromise and flexibility. Both debtors and creditors must agree to good faith disclosure and cooperation.

Workouts are often either in the form of a composition or an extension. A composition is a contract between a debtor and two or more creditors in which the creditors agree to take partial payments in full satisfaction of the debts. An extension is a contract between the debtor and creditor in which the creditor agrees to extend the time for payment of the claim. An agreement may be a composition-extension hybrid; for example, the agreement may be to accept less money over a longer period of time.

Compositions and extensions must meet all the formal requirements of contract formation. There must be an offer to make a contract, the offer must be accepted and there must be consideration, defined as the exchange between the parties of something of value.

While more than one creditor may enter into the workout agreement, there is no requirement that all of the debtor’s 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 legal remedies to collect the debts owed to them and can attempt to recover the full amounts, but they are forfeiting the present opportunity to benefit from whatever partial payments the workout would have allowed.

An attorney experienced in debtor-creditor law can help a debtor determine which repayment method may be his or her best option and can assist a creditor in determining whether to consent to the terms of an informal debt renegotiation or enter into a workout agreement. Contact an experienced debtor-creditor lawyer today.

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