One of the most frequently asked questions we receive is "What is the difference between a Work-Out and an Assignment for the Benefit of Creditors?"

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 the creditors.

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 court.

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.