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Informal Workouts

If your business has relatively few creditors, we can sometimes avoid a bankruptcy case by entering into an informal composition or “workout” with your creditors. If all of your creditors agree to an equal treatment, then their agreement to reduce their claims against your company is said to be sufficient consideration to make their agreement binding upon each other even though your company did not provide any new promises. Creditors are not required to enter into a composition or workout. You can’t force them to do this. But if the creditors have been working with you a long time, if most of your creditors want to do business with you in the future, the agreement of most of the creditors to work with you can sometimes encourage other creditors to go along with the plan.

Informal workouts or composition are more likely in small, close-knit communities where everyone knows everyone else.

We would recommend consideration of informal workouts for a business debtor with 20 or fewer creditors, most of whom are not banks but rather local vendors.

Case Study

George is a handyman. He doesn’t have any credit card debt at all. He owes some money to the lumberyard, the hardware store, the paint store, the plumbing supply house and a few workers. It was winter and he owed money to all of them. Most of George’s work is outdoors during warmer weather. George’s workers were willing to go along with him. They were even willing to agree to be paid 80% of what they were owed over 6 months. Because the workers were willing to agree, George got the lumberyard, the hardware store and the paint shop to agree to this as well. The plumbing supply house didn’t like this deal very much but grudgingly went along with it because it was a small town and everyone loved George the handyman.