What Is a Loan Workout Plan?

A loan workout plan presents the borrower with an opportunity to repay a debt and avoid default. Loan workouts are an option once a borrower has decided he or she cannot repay the debt according to the original terms. Loan workouts can be refinancing opportunities, but they are usually a mix of multiple strategies to reduce a debt.

Default Avoidance

In the case of an unsecured loan, meaning that there is no collateral at stake, a loan workout usually involves some type of refinancing to a payment plan that represents only part of the remaining owed sum. The loan workout will take place on a short time frame, guaranteeing the lender the opportunity to reclaim funds faster than if a lawsuit were to take place.

Foreclosure Avoidance

When a loan is secured, the borrower aims to avoid foreclosure or repossession by voluntarily surrendering the property and agreeing to repay any outstanding debt. The outstanding debt can be repaid after the collateral has been turned in, and this repayment usually happens on a condensed timeframe at a fraction of the original amount remaining. This option benefits lenders because they can avoid costly lawsuits and drawn-out attempts to collect. It benefits borrowers because they have a chance to save their credit. 

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