Workout Agreement

A workout agreement is a contract between a lender or borrower to renegotiate terms on a loan in default. This is often the case for a mortgage in arrears. The workout generally includes the waiver of any defaults and restructuring all terms and covenants. A workout agreement can only be made if both the lender and the borrower are interested in it.

Understanding Workout Agreements

 
 

A mortgage workout agreement is designed to help a borrower avoid foreclosure. This is when the lender takes control of the property from the homeowner because they have not paid the mortgage agreement. It also helps the lender recover some of the funds they would have lost otherwise.

Renegotiated terms generally offer some relief to the borrower, by reducing the debt-servicing burden by taking accommodative steps provided by the lender. Rescheduling payments or an extension of the term can be examples of relief. Although the benefits of a workout agreement are clear for the borrower, the lender has the benefit of not having to deal with the hassle of recovery efforts such as foreclosure in real estate and a collection lawsuit.

Another type of workout agreement can include different types of loans or liquidation scenarios. An arrangement may be made to satisfy creditors or shareholders for a business that is insolvent and cannot pay its debt obligations.

Be Aware Of The Special Considerations In Workout Agreements

The following are some general guidelines for borrowers when negotiating with lenders or considering negotiating a workout agreement:

 

Provide Ample Notice:

It is a good idea to give the lender notice in advance of any inability to pay debts. If borrowers are aware of the possibility of default, lenders will be more open to working out a workaround. Notifying borrowers in advance gives lenders confidence that they are on top of their loan management, and is interested in working with reliable partners who can be trusted.

Flexibility And Honesty Are Key:

The lender does not have to change the terms of a loan. Therefore, it is up to the borrower to be open, direct, and flexible. The lender will want to minimize its losses and maximize the recovery of the loan. Therefore, it is in the borrower's best interests to assist them as much as possible.

Consider The Tax And Credit Implications:

A workout arrangement could result in a negative credit score. However, it is unlikely to have the same impact as a foreclosure. The Internal Revenue Service, typically considers any loan cancellation or reduction taxable income. This means that the borrower may end up owing more tax in the year the workout agreement takes effect.

Go Back To The Foreclosure Overview Now.

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