A US small business that is about to go under in 2026 has more options than bankruptcy. It can negotiate a deal with its lenders to “work out” or “forbear.” It can shut down with an assignment for the benefit of creditors. This is a process that is under state law. It can be put into court receivership. It can be sold by secured creditors or have an orderly wind down. It can use remedies on specific debt, such as merchant cash advances, SBA disaster loans, or tax bills. It differs from a bankruptcy in that there is no other process that has an automatic “stay” to stop collections or a court ordered discharge. Everything will depend on if the owner wants to keep the business open, how much debt was personally guaranteed by the owner, and whether the main creditors are willing to play ball.
Personal Guarantees
The personal guarantees of the owners are not discharged by any of those options. The owners can’t get their personal guarantees discharged in the business debtor’s bankruptcy. In Harrington v. Purdue Pharma, a case decided by the U.S. Supreme Court in June 2024, it was ruled that a Chapter 11 plan of reorganization could not discharge claims against non-debtor parties without the consent of the impacted creditors. If the owner had guaranteed a bank loan, equipment lease or cash advance, the owner would need the creditors’ consent or some other resolution to their personal guarantees, whether the business wanted to restructure, liquidate or file Chapter 11.
Unpaid payroll taxes are the debt most likely to follow an owner personally. Under the trust fund recovery penalty in Section 6672 of the Internal Revenue Code, the IRS can assess any “responsible person” for the income tax withheld from employees’ pay plus the employees’ share of Social Security and Medicare tax. That person must have had real authority over which bills got paid and must have acted willfully. The IRS treats choosing to pay suppliers or rent instead of withheld taxes as evidence of willfulness. The business does not have to close for the penalty to be assessed. A person who receives the proposed-assessment letter generally has 60 days to appeal.
Out-of-court Workout
An out-of-court workout is usually the cheapest and most private option. It requires negotiation between the business and its bank or principal creditors to get an extension of time or to pay less or reduce the total amount of the debt. Often, the bank or principal creditors will agree to a forbearance agreement which means that they won’t take action while the business refinances or seeks a buyer. The bank or creditors may ask for additional collateral or new guaranties as part of the forbearance. The difficulty with a workout is that it only works against those creditors that agree to it. One creditor can still sue. Creditors with claims of $21,050 (the threshold effective April 1, 2025) or more may be able to force the business into an involuntary bankruptcy.
The tax effect of the discharged debt varies depending on whether the case is filed within a bankruptcy case or not. The general rule is that cancellation of debt results in taxable income to the debtor. Outside of a bankruptcy case, the insolvency exclusion under section 108 applies only to the extent that a taxpayer’s liabilities exceed the value of the taxpayer’s assets immediately before the debt is cancelled. In one example presented by the Internal Revenue Service, a taxpayer has debts that exceed assets by $3,000 and receives a $5,000 cancellation of debt; the taxpayer can exclude only $3,000 of income. Within a bankruptcy case, cancellation of debt is fully excluded. In both cases, a reduction of certain tax attributes, including loss carryovers and basis of assets, is required. Single-member LLC owners must be cautious because the exclusion is extended to the owner, not the business, so the LLC owner, not the LLC, must be insolvent or in bankruptcy.
Assignment for Benefit of Creditors
Assignment for benefit of creditors (ABC) A state law procedure to wind up the business. The business assigns all of its assets to a third party, who liquidates the assets and distributes the proceeds to the business’ creditors (in order of priority). An ABC is typically less expensive and less time-consuming than a Chapter 7 bankruptcy. The business’s management retains more control of the disposition of assets. An ABC requires the business’s consent. An ABC typically requires the cooperation of secured lenders. An ABC does not stay lawsuits against the business. An ABC does not provide for a discharge. (A corporation or LLC doesn’t get a discharge anyway in Chapter 7, however.)
Receiverships and sales by secured lenders are more creditor-initiated than owner-initiated. The court — state or federal — will appoint the receiver, usually because a secured lender fears its collateral is being misused. The receiver might operate the business, protect the collateral, or sell it under court approval, and the court considers appointment of a receiver an extreme remedy. A secured lender can also foreclose and sell its collateral pursuant to Article 9 of the Uniform Commercial Code, which might somewhat resemble an expedited sale under the bankruptcy code. In neither a receivership nor a sale by a secured lender is the owner likely to have much of a say, less so than under a workout or ABC.
Merchant Cash Advance Debt
Merchant cash advance debt is a type of financing that deserves its own legal analysis before any owner considers paying or restructuring the debt. In January 2025, the New York Attorney General announced a $1.065 billion judgment against Yellowstone Capital and other lending companies. State officials claimed that while the loans’ contracts purported to be purchases of future revenue, in fact fixed daily debit payments were taken from the borrower’s bank accounts, making them loans, with interest rates that allegedly reached 820% annually. Under the settlement, the state cancelled over $534 million in outstanding debt for over 18,000 businesses and demanded an immediate $16.1 million in restitution. The state’s legal action is ongoing against successor companies Delta Bridge Funding and Cloudfund. Determining whether a particular merchant cash advance is really a loan depends on the specific agreement’s terms and applicable state law.
An owner with a COVID-era Economic Injury Disaster Loan now has limited options. The SBA’s Hardship Accommodation Plan allowed EIDL borrowers to pay 10% of their regular payment for six months and continue accruing interest. The SBA eliminated the hardship accommodation plan on March 19, 2025. The SBA also removed its offer-in-compromise option for the loans in March. The remaining options for the loans are loan modification, hardship deferment, refinancing, or selling collateral. If the collateral is sold, the borrower will owe the proceeds to the SBA but still owe any deficiency. For larger loans, the business and the guarantor may need to come up with a plan for their EIDL loans that have a personal guarantee.
Subchapter V
Every business owner should know how to calculate the comparison point for Subchapter V under Chapter 11 of the bankruptcy code, which has an eligibility limit that is changing. After April 1, 2025, the business must have no more than $3,424,000 in qualifying debt. Debts to affiliates or insiders do not count towards the $3,424,000, and at least half of the debt must result from business activity. Congress has passed H.R. 7730, the Bankruptcy Threshold Adjustment Act, which would permanently raise the debt ceiling to $7,500,000. It was passed in the House on September 16, 2026, and then passed in the Senate on September 28. It is currently awaiting the signature of the president and only cases filed on or after the bill becomes law will be eligible for the higher debt limit.
Subchapter V will give small businesses new tools with no out-of-court equivalent. There is an automatic stay when the case is filed. A status conference will be held within 60 days, and the business will have 90 days to file the plan. Only the business can file the plan. Business owners will be able to retain their ownership interest in the business without infusing more funds into the business if it can commit its projected disposable income to creditors over a three- to five-year period. The court will be able to confirm the plan over creditor objections. The filing fee is $1,738 for a chapter 11 bankruptcy compared to $338 for a chapter 7, plus attorney fees. A business that fails to make payments it promised creditors over the objections of creditors won’t be able to get a discharge until it makes all promised payments.
Payments Can Be Unwound
What an owner does in making payments before deciding what to do has an impact. If a workout or ABC fails and the business files for bankruptcy, under Section 547 of the Bankruptcy Code the estate can recover many payments to ordinary creditors within 90 days prior to filing. As to insiders, such as an owner who pays back a personal loan to the company, the lookback period is a year. In business-debt cases, transfers of less than $8,575 (the threshold amount as of April 1, 2025) are protected. If the owner pays off a favored lender, or one where the owner gave a personal guarantee, while other creditors go unpaid, those payments can be unwound.
