U.S. consumers owe more than $900 billion on their credit cards, with close to $70 billion of it past due, according to a March 2010 article on the Fort Gordon Signal website. With borrowers so far underwater, some creditors are offering debt workout plans as a means to collect that debt. Such a plan can help the defaulted borrower avoid bankruptcy and allow the creditor to receive at least some payment on the principal owed.
Debt workout, by definition, is the process by which a borrower behind on paying his debts seeks a repayment plan with one or more creditors. An attorney or unsecured debt professional can facilitate such a plan by contacting creditors on the defaulted borrower's behalf in the hopes of settling the accrued debt through settlement payments. The plan can vary from extending the repayment period to reducing principal, interest and other fees.
The primary function of a debt workout is to avoid bankruptcy. If the defaulted borrower were to enter the bankruptcy process, the lender would have a harder time recovering the principal and other fees. While bankruptcy proceedings protect some of the defaulted borrower's assets, DebtSteps.com points out that others might have to be liquidated and the borrower's credit rating would be severely impacted for years. A debt workout provides a solution for both the defaulted borrower and lender in that each party keeps or receives more of the assets or monies owed.
Not every offer will be accepted by the creditor. To make an offer, defaulted borrowers first determine how much money they owe and at what interest rate, before contacting the creditor(s) directly or through a debt settlement company. According to a 2009 report on the Credit Infocenter website, many creditors accept settlements in the range of 35 to 50 percent of all monies owed.
Once contacted about a debt workout plan, the creditor reviews the offer. A creditor's trying to recover the most money possible against the owed debt, and may require other asset statements from the defaulted borrower to see how much more the borrower can pay. A lender typically makes a counter-offer, trying to gain more favorable terms than what the defaulted borrower was seeking. The negotiation continues until both parties have reached an agreement, and it may take several months before the new terms are arranged and payments begin.
After entering into a debt workout plan, the defaulted borrower makes payments to the creditor or a debt management service that pays the creditors on the borrower's behalf. These payments are deducted from the monies owed in accordance with the new plan, which could take 48 months or more to complete, according to the Federal Trade Commission.