Debt can be a significant issue for many individuals, and renegotiating loans can become necessary due to unforeseen circumstances like a job loss, medical emergency, or increase in interest rates. Renegotiating loans can help manage debt and prevent payment defaults. Here’s a step-by-step guide on how to renegotiate loans:
Step 1: Assess Your Financial Situation Before renegotiating loans, assess your financial status to determine what you can realistically afford to pay and how much you can offer your lenders. Look at your income, expenses, and debts to clearly understand your finances.
Step 2: Contact Your Lenders Contact your lenders to discuss your financial situation and request renegotiation. Provide documents to support your claims, such as bank statements, pay stubs, or medical bills.
Step 3: Explore Your Options Lenders may offer various options such as a repayment plan, loan modification, or forbearance. Consider each option and select the one that best fits your situation.
Step 4: Negotiate the Terms Negotiate the terms of the agreement with your lenders. Be clear about what you can afford to pay and ask them to work with you to find a solution. Provide additional documentation to support your claims if necessary.
Step 5: Get the Agreement in Writing. Get the agreement in writing to ensure you and your lenders are on the same page. Please read the contract carefully before signing it and keep a copy for your records.
Step 6: Stick to the Agreement Stick to the agreement you have made with your lenders. Make your payments on time and in full to avoid defaulting on your loans. Contact your lenders to discuss any difficulties you may encounter.
Conclusion
Renegotiating loans can be an effective way to manage debt and avoid payment defaults. Be honest, realistic, and persistent in your negotiations. By following these steps, you can work with your lenders to find a solution that works for you and your financial situation.
Video Transcript
In this video, you get answers to these questions:
- What is a Workout?
- Why Would a Lender Agree to Reduce a Loan?
- Step 1 – How Do You Assess Debts, Liens, and Loan Collateral in a Workout?
- Step 2 – How Do You Assess Assets in a Workout?
- Step 3 – How Do You Assess Income in a Workout?
- Step 4 – How Do You Assess Bankruptcy in a Workout?
- Step 5 – How Do You Identify Potential Funds That Creditors Cannot Reach?
- Step 6 – Should You Consider Paying Debts with Liens?
- Step 7 – Should You Consider Paying Debts with Collateral or Surrender the Property?
- Step 8 – How Do You Prioritize Debts to Pay and Not Pay?
- Step 9 – How Do You Contact Creditors for Debts You Stop Paying?
- Step 10 – How Do You Negotiate in a Workout?
- Step 11 – Why Can You Enjoy Financial Freedom After a Workout or Bankruptcy?
How do you renegotiate loans? This is a step-by-step guide to working with an attorney who helps you renegotiate your loans and do a debt workout. So imagine this problem, a business owner starts a company, it is going well, but then due to whatever reason, usually outside the business owner’s control, the business owner can’t pay the bills. The debts have grown. For whatever reason, the income is not enough to cover the debts, and so the business is going to go into the red. It is going to go under.
This happened a lot in Covid because restaurants, for example, or marketing agencies and other companies, they had contracts that got canceled. They had expected revenue like a restaurant, and then they had to close, but they still had obligations to continue to pay the bank or other business related debts or credit cards.
So what is a business owner to do? Well, one option, of course, is bankruptcy, but business owners are often wondering, is there another way? And in fact, there is; it is called a workout or a debt workout. I have a whole another video on what is a debt workout and some of the frequently asked questions regarding workout. But today, I am doing this video for an attorney friend of mine who I won’t name. But she is interested in getting into this area to help clients who are in over their head with debt and are trying to figure out what is the process for assisting a business owner, and often other clients in renegotiating their debts.
A little background, I am Aaron Hall, an attorney representing business owners and entrepreneurial companies. If you are a business owner, I am providing you with this education to help you spot issues to discuss with your attorney, not as a replacement for using an attorney. I want to help you be proactive and educate you so you can grow a great business.
If you don’t already have my free download, Seven Common Legal Mistakes Made by New Businesses, I encourage you to get it at aaronhall.com/free. It is a free PDF followed by some educational videos that are only available to subscribers. Again, there is no cost, so there is no reason not to get it. It is aaronhall.com/free. If you are a business owner, you will find it helps you keep your company out of trouble and minimize legal fees.
What Is a Workout?
Before we talk through the steps of renegotiating debt and doing a workout, let’s talk about what is a workout. A workout is just when a borrower and a lender work out a new arrangement. In other words, a debtor who has a loan with a creditor. So like a bank, for example. Might not be able to pay the payments on the loan. And so the debtor reaches out to the creditor, the bank, and says, “Hey, can we work something out?” Now you might say, “Well, why would a creditor agree to reduce a loan or renegotiate the loan? They already have a contract.” The answer is very simple. The creditor would rather get some money in a renegotiation than no money at all if the business owner files for bankruptcy. So when the business owner is overwhelmed with debts to credit card companies and bank, they often think, “Oh, my only option is to file for bankruptcy.” And what happens then? None of the creditors get any money. There is not enough money to go around. But creditors have the option of getting some money in a workout. That is why they are willing to renegotiate the debt. Now, where does that money come from? Well, obviously, if the business owner had it, that would be given up in the bankruptcy. But usually, the money comes from either friends, family equity in a home, or maybe money saved through the workout process, but it is money that the creditor would not otherwise be able to get but the business owner can make available in exchange for not having to file for bankruptcy.
Why Would a Lender Agree to Reduce a Loan?
So let’s say you have a million-dollar debt; as a business owner, is the bank better off forcing you into bankruptcy and getting $0 or letting you stay out of bankruptcy and agreeing to take $20,000 from your home equity line of credit, or from your cousin who agrees to loan you the money. Well, obviously, the bank is better off getting $20,000 instead of $0, and you, as a business owner, are better off not having to file for bankruptcy and being able to just pay back that $20,000, especially if you have a plan to move that business forward or to otherwise make some money. I have another video on frequently asked questions about workouts, so you are welcome to check that out. Now, let’s get into the steps.
Step 1 – How Do You Assess Debts, Liens, and Loan Collateral in a Workout?
Step one, how do you assess debts, liens, and loan collateral in a workout? Well, when you are thinking about negotiating with creditors, you have to figure out who are the creditors. How much do I owe each one? And are any of those loans tied to collateral or a lien? For example, if a creditor has a lien on your house, that is something we need to know because you don’t want to have to lose your house. But let’s say the creditor has a lien on a vehicle, or you have a vehicle that is collateral for the loan. Well, you might say to yourself, “I don’t need that vehicle anymore. I can surrender that vehicle.” So first, we assess how much is owed to each creditor, and then we prioritize those loans. The ones that probably need to be paid back are ones that have liens, especially if it is tied to your home. I am assuming most of these personal debts have personal guarantees, which means the business owner is personally liable for the debt in addition to the LLC or the corporation. So once we have prioritized all of those debts, and we have looked at the liens and any collateral associated with them, the business owner might say, “I want to pay one of those off because they have a mortgage on my house for example, and I want to keep my house.” Or, “These few I can’t pay and they have no lien rights.” So those are the first ones to try to renegotiate.
Step 2 – How Do You Assess Assets in a Workout?
Well, I usually ask my clients, “What do you own? Do you own a home? Any real estate, any vehicles, any investments, any collectibles, firearms, paintings, jewelry. I want to know anything really worth more than $5,000.” There is nothing magical about $5,000. That is not a number in the code. But it gives a kind of a rule of thumb that, hey, if something’s worth over $5,000, we better deal with it. If it is worth less than $5,000, it might be something we even sell, or you just don’t care a whole lot about it. Once we assess all the assets, then we take a look at, are those assets subject to bankruptcy or are they protected in bankruptcy under state exemption law or federal exemption law.
Step 3 – How Do You Assess Income in a Workout?
The other thing we want to look at is income, and this is step three. How do you assess income in a workout? Well, we are going to look at all of a business owner’s income from all sources combined. That might be a job, any businesses that are owned, investments, any royalties being received, child support, etc. You want to take all that into consideration.
Step 4 – How Do You Assess Bankruptcy in a Workout?
Well, under state law and federal law, there are different calculations that is beyond the scope of this video. But a bankruptcy attorney can basically figure out if a person files for bankruptcy, would they lose anything? Now, most people don’t realize they are not going to lose their home. They are not going to lose their furniture and their clothing, their personal assets around the home. Now, hey, if they have a brand new expensive vehicle, yeah, that will be at risk unless it is a leased vehicle or it has a loan on it. If you have a hundred thousand dollars vehicle with a hundred thousand dollars loan, what equity is in that vehicle? Nothing, that vehicle’s worth nothing to anyone else because the lender needs to get paid off first. So what we are doing then is assessing could a person file for bankruptcy and lose nothing.
If a person can file bankruptcy and lose nothing, they are a great candidate for a workout because there is a very legitimate threat to creditors that they will get nothing if this person files for bankruptcy. So that is a very important determination.
There is currently, right now, in the bankruptcy code, a test called the Means test. Basically, the idea is wealthy people shouldn’t be able to file for bankruptcy. And so under Chapter Seven of the bankruptcy code, only people who passed the means test are permitted to file for Chapter Seven bankruptcy. Now you might think, and, by the way, this means test takes a look at their income levels. Without getting too much into that, I will just tell you there is a big exception, and that is for business owners. When you have substantial business debts, the means test doesn’t apply. So usually, business owners who have gone through difficult financial circumstances in the company qualify for Chapter Seven bankruptcy.
Step 5 – How Do You Identify Potential Funds That Creditors Cannot Reach?
Every state has an exemption statute. It says certain assets are exempt from creditors. The other assets you can look at are assets you don’t own. For example, let’s say a sibling of yours is willing to lend you some money. Well, that money is not available to creditors unless you have it as part of negotiated debt workout. So here’s how that would work. You or your attorney usually would say to the creditor, “Hey, creditor, in exchange for not having to pay the full debt amount, let’s say a hundred thousand dollars, my brother will lend me $4,000 to pay you. Otherwise, I am going to file for bankruptcy.” What would the lender do in that situation? Well, If they value $4,000 over $0, the lender will accept the money from the sibling. But the key here is we are identifying funds that are out of reach of creditors. It might also be a home equity loan because home equity is protected up to a certain amount. Every state has a different amount, but I can tell you in Minnesota, it is hundreds of thousands of dollars in home equity that is protected. So typically, a business owner can borrow from their home equity in order to pay back some debts. That is if they have a line of credit.
Step 6 – Should You Consider Paying Debts with Liens?
Well, if there is a lien on any property or vehicle or anything you own and you don’t pay the debt. Then that property can be foreclosed on, essentially taken from you. So often, you will prioritize paying off debts with liens over unsecured debts. Debts that are not secured by any collateral or property.
Step 7 – Should You Consider Paying Debts with Collateral or Surrender the Property?
If you have a vehicle with a car loan on it, you might decide you need that car, and so you are going to pay that debt under the terms of the contract because if you don’t, they are going to take the vehicle. But sometimes you decide, you know what? I don’t need the vehicle, and so I am going to surrender the vehicle. You turn it over; no use playing games with it. You turn over that vehicle, they are going to sell it, and then you are going to try to negotiate the remaining debt or file for bankruptcy.
Step 8 – How Do You Prioritize Debts to Pay and Not Pay?
Well, I am often thinking about what are the relationships you will need after filing for bankruptcy if that’s the way you need to go. So typically, that is going to be family members. So if you have any debts to family members, that is often a high priority to pay. Next, it is going to be a high priority to pay any loans that are secured by property you want to keep. And then, after that, all the unsecured creditors, they are usually not a priority for paying. Those are the ones that you are gonna renegotiate with.
Step 9 – How Do You Contact Creditors for Debts You Stop Paying?
You stop paying. Well, if you contact a creditor to try to negotiate the debt while you are timely in making payments, they usually won’t work with you. But once you stop making payments on a debt, so you have breached the contract, usually, within a short amount of time, those creditors start reaching out to you. Now, most people don’t want to handle this on their own, so they make a list of the creditors and the recent correspondence, and they send it to an attorney like me or another attorney who does workouts. The attorney then sends a letter to these creditors, and it simply says, “I have been retained to either do a workout or a bankruptcy. Could we talk with you about the debt here and see if we can work out something?” All right. Typically, when I send that, the creditors are willing to work with us.
On average, they will take less than 20 cents on the dollar. Many times it is even 10 cents on the dollar or less. In other words, a hundred-thousand-dollar loan might get paid back for $10,000 or $8,000. But in order to do that, the creditors need to know that the business owner truly has a hardship, truly could file bankruptcy, and the creditor will get nothing. So the creditor will request financial disclosures. Sometimes that is a personal statement, a financial statement that talks about everything they own and owe and where all their money is. Maybe they want tax returns. They always want bank statements because they want to see how much money’s actually in the bank account. And by the way, it is okay that there can be some money in there. For example, if the business is still going, you probably have money for payroll. Payroll is another one of those financial obligations that are of the highest priority to pay because in states like Minnesota, it is a crime not to pay employees, so employees always get paid first.
Step 10 – How Do You Negotiate in a Workout?
Well, once I explained the creditors the situation, the dire financial circumstances my clients in, and then provided financial disclosures, like bank statements, tax records, personal financial statement, etc. Usually, the creditor has a pretty good understanding that this person could file for bankruptcy like that, and if they do, then the creditor’s going to get nothing.
So my role is simply helping the creditor face the music, get comfortable with reality, and in my experience, creditors aren’t willing to do that right away. When creditors don’t get paid on a hundred thousand dollars debt, for example, they might take $96,000, but they do not want to just jump down and take six thousand. So how do we get from $96,000, which might be a creditor’s opening offer, to $6,000 or $12,000 or whatever that may be? Usually, it just takes time. So as an attorney, I am doing my best to work with all the creditors at the same time. And what happens is over time, they get the financial disclosures, and they start getting tired and realizing, yep, there is no money here. It is not worth spending time and effort, and investment going after $0 because as soon as a creditor forces a business owner to file for bankruptcy, the creditor’s going to get nothing or very little usually. But creditors, I find, are usually not ready to come to that reality until six to nine months into the negotiation process. Some creditors get it sooner than others. Some creditors also realize, “Hey, if I can get my money now, even if there is a bankruptcy four months down the road, that money may not be clawed back.”
There is a whole issue with bankruptcy. Let’s say there’s a payment of $20,000 to a creditor on Wednesday, and then on Friday, the business owner who paid that creditor files for bankruptcy. Well, under the bankruptcy code, the trustee can just claw that money back. What does that mean? It means the bankruptcy trustee appointed by the bankruptcy court sends a letter to the creditor and says, “Send me back that money; send me a check.” And by law, they have to, and if they don’t, they are in trouble. And you don’t want to mess with a federal bankruptcy court trustee. They have a lot of power.
Step 11 – Why Can You Enjoy Financial Freedom After a Workout or Bankruptcy?
So at the end of the day, we hit step 11, and that is financial freedom. You, as business owners, will eventually get financial freedom one way or the other, either by an attorney helping you negotiate a workout with all your creditors or filing bankruptcy. Now, bankruptcy’s not a bad option, but it does take time. It takes money. You have a public bankruptcy on your record and, it can cause some stress. It is not a quick and easy, one-and -done. On the other hand, a workout also takes time. We talked about it could take six months or nine months, and a workout generally will cost more money, but it avoids bankruptcy.
So as a business owner is thinking about, do I want to do bankruptcy or not? It probably depends on whether they believe their business is viable and it can keep going. It can take off. There is one other consideration here, and let’s call this the bonus step. A business owner who files for bankruptcy turns over those shares of the business to the bankruptcy estate the trustee manages them. But often the trustee doesn’t want them. Why would you want a business without somebody to run it, which has a bunch of debt? So that is usually the case. What that means is usually, business owners can start a fresh LLC or corporation after filing for bankruptcy and reach out to those same customers and employees. Sometimes, it is the day after filing bankruptcy. The business owner can build a new business with the same relationships and people and intelligence in their head that they were using with the old business. But the new business isn’t saddled with all the debt. That is possible at times with bankruptcy. And then, of course, in a workout, the business owner is able to negotiate the debt and so the business can move on without being saddled by that debt in a workout. So whether it is by bankruptcy or through a workout, business owners can get to financial freedom where they are not subject to overwhelming debts.
So what do you do if you are a business owner and you are wondering, how do I find an attorney like this? Well, it is not easy, but here are a couple tricks. First, many bankruptcy attorneys do workouts, so you want to look and see on the bankruptcy attorney’s website, did they talk about workouts at all? And you can ask them how often do they do workouts, what percentage of their clients are workout clients versus bankruptcy clients.
Some of the law firms that just do a ton of low-end bankruptcies for individuals, they may not do workouts, but the law firms that do bankruptcies for business owners usually do workouts. And then there are business attorneys like me. I also do workouts. I have been in bankruptcy court. I have worked with clients on bankruptcy matters and doing their filing and representing them in bankruptcy court. But these days, I use a bankruptcy attorney, and we are closely with him so that if the client does need to file for bankruptcy, the client is using an attorney who is in bankruptcy court every day or thereabouts. Whereas I, as a business attorney, am not regularly in bankruptcy, but I am regularly dealing with workouts. So you are going to want an attorney who knows the bankruptcy law but also is not just going to push you into a bankruptcy and is willing to weigh your options and analyze whether a workout is a viable option for you, what are the pros and cons and risks associated with that, and then who can walk you through that process.
So again, some bankruptcy attorneys and some business attorneys do workouts. What I would ask any prospective attorney you are looking to hire is what percentage of your practice is negotiating workouts? And if you are a business owner dealing with this, I would ask, how many of your clients are business owners? What percentage of your workouts are business owners?
Conclusion
So today, we talked about how to renegotiate a debt and, specifically, a step-by-step guide to doing a debt workout. If you have questions, feel free to put them in the comment section below. You are welcome to subscribe to this channel if you like educational, legal content like this. Content designed for business owners to avoid problems and to grow your companies. Feel free to subscribe or like this video, and YouTube will recommend more to you.
The next video I will be doing is How do you file your annual LLC renewal? Every year throughout Minnesota and many states, business owners have to file a renewal for their LLC or corporation. If they don’t, they risk that corporation or LLC being terminated. And then they lose personal liability shields. In other words, you become personally liable for the business if the business no longer exists because now you are essentially working as a sole proprietor.
So subscribe if you are interested in getting notified when that next video comes out. I also have some free resources down below in the description; you will find a link to the other video that talks about workouts and some other online content that you may find helpful.
Alright, there you have it. You may be overwhelmed with business debts. Your business might be crumbling. Bankruptcy isn’t the only option. You can go work with an attorney who can do a workout for you, and if that doesn’t work, you can file bankruptcy. Either way, you will get a fresh start with all those debts behind you, and you won’t forever be buried by this. There are some other benefits of doing a workout that I haven’t covered in this video. Those are unique to each situation, and I would recommend you talk with an attorney experienced in workouts to figure out whether a workout is best for you. My hope is that this video educates you, empowers you, and helps you have a successful business and a great life. Thanks for joining me today.