Creditors are often faced with a difficult decision when a borrower defaults on a loan. In order to stay in business, creditors must collect on as many loans as possible. However, there are different ways to collect on loans and different factors that determine which way is the best way to try to collect the money owed in a given situation. Primarily, creditors have three options. They can enter a loan workout, they can initiate litigation or they can foreclose or repossess the property that secures the loan.
Loan workouts, also known as debt restructure, involves the creditor and borrower working together to come up with revised loan terms. The parties could agree, for example, to extend the repayment period in order to lower monthly payments, lower the interest rate, or they could agree to reduce the total amount of money that needs to be repaid.
At first glance, it might seem like a loan workout unfairly benefits the borrower and that such an arrangement would not be in the best interest of the creditor. However, in many situations it is in the best interest of the creditor for the following reasons:
In many cases, it makes sense to pursue a loan workout prior to pursuing other methods to collect on a loan that is not being repaid according to schedule. However, sometimes loan workout negotiations do not result in an agreement. In those cases, the creditor may pursue the money that is owed according to the collection procedures set forth in the original loan document. Often, those procedures include litigation and / or foreclosure. Creditors who pursue litigation or foreclosure should contact an attorney who specializes in debt collection to assist them.
Loan workouts provide many benefits to both creditors and debtors. While creditors want to be repaid according to the original loan documents, most creditors, especially in today’s economy, understand that adjusting the terms of the loan through a loan workout agreement is preferable to other methods of loan collection or to not being paid at all.
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