How Debt Workout Programs Work

Businessman drowning chained with a weight Debt
Photo: Andrew_Rybalko / Getty Images

If you’re having trouble making loan payments, you’ve got several ways to solve the problem. One option is to negotiate with your lender to arrive at a payment program that is acceptable to everybody—a payment you can afford along with a payment that they’re willing to agree to. These agreements are sometimes called debt workout programs.

Why Negotiate a Workout

Sometimes negotiating with your lender is the best option for everybody. From your perspective, it gives you a solution to your problem of not having enough money to repay your loan. If you don’t pay, the consequences are real: your credit scores may fall, and you will face additional fees and potential legal troubles. Your next best alternative might be bankruptcy, which is an expensive and difficult process (plus it will affect your credit for at least seven years, and you might still owe money in the case of any deficiency).

If you’re unable to pay your loans or find a solution, you may lose any collateral that was used for the loan. For example, if you borrowed to buy a house, you face the risk of foreclosure, and any defaulted auto loans could lead to repossession (making it hard to get to work and continue earning a living).

From your lender’s perspective, a settlement of some sort might also be attractive. If you declare bankruptcy, your lender risks losing even more. It’s also expensive and time-consuming for lenders to take your collateral, and that’s not their core business anyway—they’d just like to get money from you.

Types of Workouts

There’s no single solution to your debt problems. It’s essential to look at your finances and figure out what you’re able to afford. Then, it’s a matter of negotiating with your lender and deciding what is possible. A few potential solutions include:

  • Lower APR: lowering the annual percentage rate (APR) on your loan may make your payments more affordable. Your monthly payments are based on several inputs, and the interest rate is one of them. A lower rate—even if it’s just temporary—means you’ll pay less each month, which can help you get caught up.
  • Forbearance: it might also be possible to skip (or reduce) a few of your monthly payments. This can serve as a “breather” that helps you get caught up. You’ll have to make up for those payments later, and you might end up paying more in interest, but you’ll get through your current cash-flow crunch.
  • Longer-term: the length of your loan is another driver of your monthly payment. The longer the term, the lower your payment. For example, 30-year mortgages have lower monthly payments than 15-year mortgages. Extending the term of your loan will result in you paying more interest over the life of your loan.
  • Alternative repayment schedule: based on your knowledge of your situation, you might be able to come up with some alternatives. All your lender can do is say “no,” so be creative and just ask.

When to Ask for a Workout

Get in touch with your lender as soon as you know that you’ll be unable to make your payments. The sooner you reach out, the more options you’re likely to have. Some will tell you that you should stop making payments and then talk to your lender (because you presumably have leverage), but that strategy is risky.

Think of it this way: if you stop making payments, you no longer have the option to stop making payments—so try to find a solution before you get to that point. If your loan is already in default, you can still try to negotiate. But you might lose certain options if you’re currently in default.

Consequences of Settling your Debt

Any settlement you reach will affect your credit. You’re not repaying your loan on time, as agreed, and your credit reports will reflect that fact. However, you might also be able to negotiate how the loan is reported on your credit reports, and you may find that a settlement is better than bankruptcy. There might also be tax consequences if your lender lets you pay less than you owe. If you get a Form 1099 for the forgiveness of tax debt, talk with your local attorney or tax advisor.

DIY or Hire

There are numerous companies out there promising to help you with your debt problems. They might require that you make payments to them instead of to your creditors, or they might just negotiate on your behalf.

Be aware that the debt settlement industry is full of problems. Some companies prey on vulnerable consumers who have run out of options, and they end up doing more harm than good. Not all companies are crooked, but plenty of them are.

If possible, try and negotiate with your lenders yourself first. You’ll learn a lot, and you might save a lot of money. Be prepared to talk with customer service agents, explain your personal financial situation (and prove that you can’t make your payments), and fill out numerous forms. The process isn’t terribly complicated, but it takes time and patience.

If you reach an agreement with your lender, be sure to get everything in writing, and keep copies of all correspondence. When working with anybody—whether it’s your lender, a credit counseling agency, or a debt relief company—pay attention to excessive promises and guarantees. If it sounds too good to be true, it almost certainly is.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Experian. "Bankruptcy: How it Works, Types & Consequences."

  2. Internal Revenue Service. "About Form 1099-C, Cancellation of Debt."

  3. Federal Trade Commission. "Debt Relief and Credit Repair Scams."

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