Whether you are a small business owner or an individual who is insolvent (cannot pay their debts as they come due), then you may look at doing a workout outside of bankruptcy. The starting point for this, oddly enough, is to get an analysis by a lawyer who practices bankruptcy to see what a Chapter 7, Chapter 13, or a Chapter 11 would look like. This requires looking at debt, assets and income. The attorney would see if you qualify for a Chapter 7 or if you can bypass the means test. It would also involve looking at what a plan would look like in a Chapter 13 and whether a Chapter 11 would actually be cost-effective. For example, if you have a certain level of debt, you are precluded from a Chapter 13, but if most your debt is personal rather than business, you could be precluded from filing a Chapter 7.
Once you know what is at stake and what is exempt in a bankruptcy, you have a cut-off point where it no longer makes financial sense to pursue a work-out with creditors. This helps one avoid the tendency to start down one path and just keep going no matter what to the bitter end. Instead, you draw the stopping point before hand. You will also know what you have to offer to bring creditors to the table; you’ll know what the creditors will lose and what you can afford to put forward as incentive. If you have nothing new to offer to creditors or if they would not lose significantly more in a bankruptcy, then the work-out will likely fail.
If a workout is going to be preferable, the next thing to do is avoid doing it one creditor at a time. Over and over again I have seen people tackle one creditor at a time to great success in negotiating a settlement only to arrive at the end to have one creditor refuse to play ball. In this scenario, the person has usually paid out thousands in lump sum payments settling with creditors but STILL be forced to file bankruptcy because of one recalcitrant creditor. Often, the thousands paid out would have been exempt assets they could have kept through the bankruptcy. So, to do a workout you must be negotiating simultaneously with all one’s major creditors and condition any deal with a single creditor on the remainder of the creditors coming to the table. Sound impossible? Unfortunately, it often is impossible, but with skillful negotiating and armed with knowledge, it can happen.