One of the most frequently asked questions we receive is "What is the difference between a Work-Out and an Assignment for the Benefit
The simple answer is that a Workout is the out-of-court equivalent of a Chapter 11 Bankruptcy and the Assignment is the equivalent of a
Chapter 7 filing.
There is not sufficient space to discuss both so in this column we will discuss the Workout and in our next column we will address the
Assignment for the Benefit of Creditors. Work-outs
are arrangements that the debtor makes with it creditors whereby the
creditors generally agree to "back off" and take no negative action while the debtor "works out" its debt arrangements with
These arrangements are voluntarily and no creditor is obligated to agree to "back off" or to the terms of the workout. Unlike
Chapter 11, there is no automatic stay nor can the
majority of creditors compel the minority to comply.
Workouts tend to be most effective when the debtor has already reached an agreement with its secured creditors and needs time to obtain the
cooperation of the unsecured creditors.
The Workout generally commences with the debtor's attorney or a third party
engaged by the debtor's attorney contacting the creditors and inviting
them to an informal meeting. There the creditors are apprised of the
debtor's situation and its intention to work out its financial problems
without resorting to filing a bankruptcy petition. The advantage to
the creditors is fewer expenses and delays in reorganizing the debtors business.
The disadvantage is no formal reporting requirements on the part of
the debtor to the trustee.
If the creditors agree, usually a committee of the unsecured creditors is formed (not unlike Chapter 11) and they work with the debtor to
create a turnaround plan that is acceptable to both
parties. Another advantage is that if the parties cannot
reach an agreement and the debtor eventually files a
Chapter 11 petition a plan has already been prepared to present to the
The success rate of a workout is generally the same as a Chapter 11. The advantages are no court intervention and fewer costs that leave
more money available to the creditors.
THE PRECEDING HAS BEEN PROVIDED AS GENERAL INFORMATION ONLY! FOR
LEGAL ADVICE, CONSULT WITH YOUR ATTORNEY!
I wish you well.