Step-by-step: How to prepare and propose a loan workout

  1. Assess the problem and your goals
  • Quantify the hardship: lost income, unexpected expenses, or a short-term cash-flow shock. For businesses, compile 3–12 months of profit & loss and cash-flow projections. For households, list monthly income, essentials, and discretionary spending.
  • Decide your goal: short-term relief (forbearance), long-term affordability (modification), or partial repayment. This helps you pick realistic options to propose.
  1. Gather the documents lenders typically require

  • Recent pay stubs or business bank statements

  • Last two tax returns (business or personal) and recent profit-and-loss statements

  • A hardship letter explaining cause, timeline, and recovery plan

  • Cash-flow projections or a proposed budget

  • Letters from suppliers, attorneys, or medical providers if relevant

    For a ready checklist of lender documents, see FinHelp’s Loan Modification Checklists: Documents Lenders Usually Require (internal guide).

  1. Draft a clear, realistic repayment proposal

  • Keep it simple and numbers-driven. Include:

    • Current loan balance, rate, and monthly payment
    • Proposed payment amount, interest rate (if asking for a change), and new term
    • Start date and duration (temporary relief vs permanent modification)
    • Supporting cash-flow schedule showing payments are affordable

    Sample short proposal (example):

  • Current payment: $1,500/mo

  • Proposed: $900/mo for 12 months, then $1,150/mo for remaining term (principal capitalization: $3,600)

  • Rationale: Temporary revenue drop of 40% with projected recovery to 85% of prior sales within 9–12 months

  1. Contact the lender and open the conversation
  • Call the loan servicing department and ask for the workout or loss-mitigation team. Take notes: agent name, date, and next steps.
  • Email or upload your hardship letter and proposal per the lender’s instructions. Be prompt and organized.
  1. Negotiate options and know typical lender responses
  • Common workout options: term extension, temporary interest reduction, payment deferral, split-suspended payments, or principal forbearance.
  • Understand the difference between modification and forbearance and which suits your needs (see FinHelp’s comparison of Loan Modification vs Forbearance).
  • Expect counteroffers. Be prepared to show why your plan is the most likely route to full repayment.
  1. Confirm terms in writing and review for risks
  • Never accept verbal promises. Ask for a written agreement and read for fees, capitalization of missed interest, or new covenants that change obligations.
  • Check how the agreement will be reported to credit bureaus—modifications can be reported differently and may affect credit (see CFPB guidance on mortgage options and loss mitigation).
  1. Implement the plan and document every payment
  • Make payments exactly as agreed and keep a paper trail. If cash flow improves, consider re-amortizing or paying down principal when possible.

Timeline and what to expect

  • Response times vary: some lenders acknowledge receipt in days but underwriting and approval can take 30–90 days depending on complexity. Government-backed loans and regulated servicers may follow specific timelines (see Consumer Financial Protection Bureau resources).

Common mistakes to avoid

  • Submitting an unrealistic proposal that you can’t sustain.
  • Failing to provide requested documents promptly.
  • Accepting oral promises or not getting changes in writing.
  • Overlooking tax consequences if debt is forgiven—consult the IRS guidance on cancellation of debt for tax implications.

When to seek professional help

  • Hire a HUD-approved housing counselor for mortgage workouts (if applicable) or a small-business advisor for commercial loans. For complex commercial negotiations, a bankruptcy attorney or experienced loan workout attorney can protect your interests.

Practical tips from my experience

  • Be proactive: lenders prefer a borrower who communicates early and shows a plan.
  • Keep the proposal focused on repayment ability, not emotion.
  • Offer workable alternatives (short-term forbearance followed by a term extension) rather than a single ask.

Credit, reporting, and tax notes

  • A workout can still affect credit reporting and may appear as a modification or other status on credit files. Check CFPB resources for how servicers handle reporting.
  • Debt forgiveness or cancellation may be taxable—check IRS guidance or talk to a tax advisor.

Internal resources

Authoritative sources

Professional disclaimer
This article is educational and based on general experience; it is not personalized financial, legal, or tax advice. Consult a qualified financial advisor, tax professional, or attorney about your specific situation.