A workout agreement is a non-bankruptcy option that a debtor may pursue to satisfy a debt. The debtor or his attorney contacts the creditor to arrange a payment plan that differs from the one originally entered into by the debtor and creditor. The plan may call for full payment of the debt over a longer time period, a reduced interest rate, a one-time payment that represents an amount less than the full amount owed, payments over time for an amount that is less than the full amount due, or a combination of these options.

Benefits and Disadvantages of a Workout Agreement

One of the primary benefits is that the debtor avoids the stigma, cost, and time involved in a bankruptcy proceeding. A debtor may also be able to keep and control certain “hard” assets such as real estate and vehicles as well as “soft” assets such as cash. A bankruptcy stays on a debtor’s credit report for ten years, where a workout will generally be reported for seven years.

One of the primary disadvantages to a workout agreement is that a person with good credit could see a dramatic decrease in his credit scores following a workout.

What Debts Can Be Covered in a Workout Agreement?

Workout agreements are used for mortgages, credit cards, and secured and unsecured debt. A workout is applicable to almost any type of loan, except for government-backed student loans, for which a debtor may still be able to negotiate a reduction of fees and interest.


There are several ways in which to form a workout agreement for mortgages:

  • Modification of an existing mortgage – The parties modify the loan’s terms, usually temporarily.
  • Granting the deed to the creditor in lieu of foreclosure – The debtor gives the home back to the creditor in exchange for forgiveness of any loan deficiencies.
  • Friendly foreclosure – the mortgage holder sells the home at foreclosure and gets a clean title. The property is then sold back the debtor or another party.
  • Short sale – The property is sold to a third party in exchange for forgiveness of the debt.
  • Short refinance – The debtor refinances the property for a loan amount that is less than the original loan amount.
  • Repayment plan – The debtor makes a down-payment on the arrearage and promises to pay the balance of the arrearage over time.
  • Repurchase after foreclosure – The debtor buys back the property after foreclosure.
  • Forbearance – the creditor temporarily discontinues legal action in exchange for the debtor’s promise to something, such as list the property with a real estate agent.

Credit Cards and Other Unsecured Debt

A debtor may also be able to obtain a workout agreement for credit card and other unsecured debt. Typically, debtors who have assets to protect, such as a home or vehicle, and are on the brink of bankruptcy are good candidates for a workout.

In this situation, the debtor offers to settle the debt at a discount or to pay off less of the debt over a longer time. For someone who has good credit, a workout will likely make a debtor’s credit score worse. For someone who has bad credit to start, a workout will make the credit score slightly better.


A workout agreement can work for a variety of loans, both secured and unsecured. Sometimes a workout agreement is preferable to bankruptcy as it allows the debtor to retain more assets and avoid the stigma associated with bankruptcy.