What is a 'Workout Agreement'

A workout agreement is a mutual agreement between a lender and borrower to renegotiate terms on a loan that is in default. Generally, the workout includes waiving any existing defaults and restructuring the loan’s terms and covenants. A workout agreement is only possible if it serves the interests of both the borrower and the lender.

BREAKING DOWN 'Workout Agreement'

A workout agreement intends to help a borrower avoid foreclosure, the process by which the lender assumes control of a property from the homeowner due to a lack of payment as stipulated in the mortgage agreement. Workout agreements apply to liquidation scenarios as well. A business that becomes insolvent and cannot meets its debt obligations may seek an arrangement to appease creditors and shareholders 

The renegotiated terms will generally provide some measure of relief to the borrower, in terms of reducing the debt-servicing burden through accommodative measures provided by the lender. Examples of relief can include such as offer as extending the term of the loan or rescheduling repayments. While the benefits to the borrower of a workout agreement are obvious, the advantage to the lender is that it avoids the expense and effort of payment recovery efforts, such as foreclosure.

Considerations When Negotiating Workout Agreements

For borrowers, general best practices to consider when negotiating, or thinking about negotiating, a workout agreement with a lender include the following.

Provide ample notification. Giving lender advance notice of an inability to meet any and all debt obligations is a courtesy to extend. Most lenders will likely be more accommodating when borrowers seek a workout agreement if they are aware that default could be an issue. Providing notice engenders confidence that the borrower is on top of their loan management and interested in being a reliable business partner that the lender can trust. 

Workout agreement terms will vary. A lender is not under any obligation to restructure the terms of a loan, so it is incumbent on the borrower to be honest and direct. However, the lender will likely want to limit their losses and maximize recovery of the loan they granted, so it is likely in their best interest to help the borrower, to the extent that they can extent. 

There are tax considerations as well. Any type of adjustment to the terms of a loan in a workout scenario could affect the borrower’s tax situation. Typically, the Internal Revenue Service (IRS) treats any loan reduction or cancellation as taxable income

RELATED TERMS
  1. Workout Assumption

    A workout assumption is an arrangement by which a third party ...
  2. Workout Market

    A workout market is a market maker prediction as to the trading ...
  3. Short Refinance

    A short refinance is the refinancing of a mortgage by a lender ...
  4. Borrowing Base

    A borrowing base is the amount of money a lender will loan to ...
  5. Five Cs Of Credit

    The five C's of credit is a method used by lenders to determine ...
  6. Recourse Loan

    A recourse loan is a type of financing that allows a lender to ...
Related Articles
  1. Investing

    Battling Foreclosure: The HOPE NOW Alliance Strategy

    Hope Now was formed to help prevent foreclosures. Are the organization's strengths enough to overpower its weaknesses?
  2. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  3. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  4. Financial Advisor

    Tips To Improve Chances Of A Small Business Loan

    Enhance your small business loan eligibility by keeping these important tips in mind.
  5. Personal Finance

    Conquering The Terms Of Your Mortgage

    Buyers with big down payments should get the best mortgage terms. Unfortunately, the equation isn't that simple.
  6. Personal Finance

    What Are Mortgage Lenders Allowed To Ask Borrowers?

    Seemingly intrusive or irrelevant questions are actually legal for lenders to ask of mortgage applicants.
  7. Personal Finance

    How to Find the Best Refinance Companies

    From traditional lenders to online loans, here's everything you need to know about refinancing your mortgage.
  8. Personal Finance

    5 New Barriers to Getting a Mortgage

    New lending requirements have made it much tougher to get approved, and some common situations that may not have presented a problem for approval in the past, do now.
  9. Personal Finance

    Getting A Mortgage: How The Process Has Changed

    After the banking crisis, banks have tightened their lending standards. Find out how the current mortgage-lending standards have changed in the last five years.
  10. Personal Finance

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
RELATED FAQS
  1. What’s the Difference Between a Mortgage Lender and a Mortgage Servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  2. Does inflation favor lenders or borrowers?

    Find out under what circumstances inflation benefits borrowers more than lenders and in which situations inflation can be ... Read Answer >>
  3. What is the difference between secured and unsecured debts?

    Learn about the differences between secured and unsecured debt — and how banks buffer risks associated with each type of ... Read Answer >>
  4. What is PMI payment, does everyone need to pay it?

    No – PMI Payment is only required for those who can't make a 20% down payment on the home they're purchasing. The PMI payment ... Read Answer >>
Trading Center