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Voluntary Workout versus Bankruptcy

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What are the advantages and disadvantages of a voluntary workout to resolve financial distress? What are the advantages and disadvantages of declaring bankruptcy to resolve financial distress?

Smart, S., Megginson, W., Gitman, L. (2007). Corporate Finance , Thompson South-Western. Chapter 24-25, pages 870-922

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This solution discusses the advantages and disadvantages of a voluntary workout to resolve financial distress. The advantages and disadvantages of declaring bankruptcy to resolve financial distress are also overviewed.

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1. What are the advantages and disadvantages of a voluntary workout to resolve financial distress?

A person could decide to take a loan to pay off a debt(s) to resolve financial distress, for example. This has an advantage if you do not own too much debt, and the payments will not be more than you can afford. Then, it would be a disadvantage, as you would have large payment for a long period of time. Another advantage would be that you keep your credit rating in good standing and do not get the stigma associated with bankruptcy. You also get to keep your assets and property.

Another way to voluntary workout a resolution is an individual voluntary agreement. The advantages and disadvantages of an individual voluntary agreement (IVA) include:

o With an IVA you can have up to 75% of your debt written off, and there will be no more interest or charges added.
You agree to pay what you can afford in a single monthly payment. After the duration of the IVA, which is usually 5 years, you will be debt free, and your creditors bound by the IVA's terms and cannot recoup any further money from you.
o Unlike bankruptcy, in an IVA agreement, you will rarely have to sell your home and other major assets such as a car. In fact with an IVA you are in a much better position to negotiate any agreed settlement, whereas for bankruptcy your assets are entirely in the hands of the presiding magistrate when your proceedings come to ...

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