Negotiate with All Its Creditors
A business can negotiate with all its creditors at the same time. Lots of small businesses do that. The problem is that out of court, each deal is a voluntary agreement. No creditor can be made to accept less than they’re owed. A holdout lender can keep suing, levy bank accounts, or enforce a personal guarantee while the rest of the creditors are in settlement. The success of a group workout hinges on the profile of the business’ creditors. Who has a lien and who has the owner’s personal guarantee. Whether a business owes payroll taxes or federal loans. Whether or not a business could go through a court reorganization if negotiations fail.
Third, the holdout problem should be considered. One way owners often make settlement offers is to condition each offer on all of the major creditors agreeing to it. This ensures the company does not waste cash on small creditors while the big creditor continues to harass it. (A benefit of Chapter 11 bankruptcy is the resolution of the holdout problem.) According to 11 U.S.C. § 1126(c), a class of creditors accepts a plan if creditors that hold at least two-thirds of the dollar amount and more than one-half of the number of claims that actually vote approve it. The vote then is binding upon the creditors who do not approve the plan, something that a private workout can never accomplish.
Creditors Do Not All Have Equal Rights
Fourth, timing is important because creditors do not all have equal rights. The lender who filed the UCC-1 financing statement with the secretary of state likely has a security interest in the assets of the business listed on the document. A blanket lien may even have been filed and cover everything the company has. There is an order of priority to claims, and between secured lenders the creditor who filed first would likely have priority. Before unsecured creditors get a penny, the secured creditors are paid from the proceeds of the collateral. A search of the UCC filing in the state in which the business is located will show who filed and when. That allows the owner to determine who has real bargaining power and who might accept a discount.
Personal guarantees require separate consideration in any workout involving more than one creditor. A guarantee typically allows the creditor to seek payment of the full amount from the owner even if the owner owns a minimal percentage of the company. A comprehensive settlement agreement will include the reduced amount and payment terms. It should address treatment of liens, judgments and guarantees. For a secured debt, the owner should be certain that the creditor files a UCC-3 termination statement to remove the lien from the public record.
Payroll taxes complicate any workout in which an owner has the power to decide which debts are paid. See Internal Revenue Code § 6672. The Trust Fund Recovery Penalty (“TFRP”) may be imposed on any “responsible person” who willfully fails to pay over employee withheld income taxes and employee share of Social Security and Medicare taxes. “Willfulness” does not require intent to defraud the government. The person can be found to be willful just by knowing that the taxes were due and choosing to pay other creditors. The penalty is the entire amount of the unpaid trust fund taxes, it can be imposed on multiple people, and it survives the dissolution of the business. A workout in which the business pays its vendors but not the trust fund taxes may result in the debt being transferred to the owner personally.
Debt owed to the U.S. Small Business Administration (SBA) is not subject to the rules and regulations governing most debt collection but does come under the rules governing the collection of federal debt. All federal agencies must provide at least 60 days’ notice of their intent to refer a debt to Treasury. Federal nontax debt must be referred to Treasury for offset when it is more than 120 days delinquent and is generally referred to Treasury Cross-Servicing at 180 days delinquent. Once referred to Treasury, all federal payments to the debtors may be intercepted. The debt referred to Treasury generally does not come back to the SBA. SBA’s offers in compromise are generally lump sum offers that are required to be paid in about 60 days after acceptance. They generally require that the business be closed and the collateral be liquidated, but an ongoing business can make a “going concern” offer.
MCA Funders
Merchant cash advance funders tend to be the quickest to act so should be included first. Many merchant cash advance contracts included confessions of judgment in which a funder could obtain a judgment against a business without filing a lawsuit. On August 30, 2019, New York modified its CPLR 3218 and a confession may only be entered in the county in which the debtor resides. State regulators also took action directly against abuses by MCA funders. In January 2025, New York’s Attorney General obtained a $1.065 billion judgment and settlement against Yellowstone Capital. The State claimed that Yellowstone made loans to over 18,000 small businesses, but represented that they were merchant cash advance contracts, at effective interest rates of up to 820%. More than $534 million in outstanding loans were forgiven.
Federal regulators have taken similar actions. In June 2022, the FTC obtained an order against RCG Advances (formerly Richmond Capital Group) and its owner Robert Giardina that barred them from participating in the merchant cash advance business and forced them to pay over $2.7 million and vacate judgments and liens against former customers. In February 2024, the federal court ordered co-defendant Jonathan Braun to pay $20.3 million. These cases give the owner with several MCA balances evidence that an agreement structured like a loan may be vulnerable to usury and deception claims. Those claims could make them more powerful in negotiations.
Clawed Back
A failed workout may lead to the unraveling of prior payments. 11 U.S.C. § 547 generally permits a bankruptcy trustee to recover any payments made on a prior debt to any creditor within 90 days before the bankruptcy filing. That period increases to one year for a “relative” or insider, which includes an owner. Any payments made to some creditors shortly before a bankruptcy filing can therefore be clawed back and distributed to other creditors.
For cases filed on or after April 1, 2025, a business debtor’s bankruptcy trustee may not recover a transfer to a creditor with an aggregate value of less than $8,575. Other defenses may also apply, such as for payments in the ordinary course of business.
Creates Taxable Income
Debt forgiveness generally creates taxable income. A creditor that cancels $600 or more of debt is required to report it by Form 1099-C, but any lesser amount canceled is also generally treated as income. This example from IRS Publication 4681 is pretty clear: If you had a $1,000 debt that you settled for $400, then $600 is canceled debt. Canceled debt is excluded to the extent that the taxpayer was insolvent immediately before the cancellation (that is, liabilities exceeded the fair market value of assets). Debt that is forgiven in bankruptcy is also excluded. Either exclusion is claimed on Form 982, and Internal Revenue Code § 108(b) generally requires that tax benefits such as loss carryovers and asset basis be reduced in exchange.
Debt Settlement Company
A business owner may also receive more limited protections from a debt settlement company. As of October 27, 2010, the Federal Trade Commission’s Telemarketing Sales Rule prohibits “for profit” debt relief companies who sell by phone from charging fees before they settle a debt. However, the rule is largely exempted from the Telemarketing Sales Rule’s coverage of calls “placed by a business” rather than to “a consumer.” In 2024, the FTC limited its changes to the Telemarketing Sales Rule’s ban on misrepresentations to apply to calls to businesses, but not its ban on advance fees. So, in this way, a debt settlement company who negotiates only with businesses can legally collect advance fees. Thus the fee structure must be carefully considered.
Court Supervised Plan for Smaller Companies
Subchapter V of Chapter 11 of the United States Bankruptcy Code is generally the main court supervised plan for smaller companies. For cases filed on or after April 1, 2025, to be eligible, Subchapter V debt must be less than or equal to US$3,424,000. The Bankruptcy Threshold Adjustment Act of 2026 would permanently raise the debt limit to US$7,500,000 for cases filed after enactment. As of early October 2026, the bill had passed both houses of Congress and was awaiting the president’s signature. Only the debtor can propose a plan, and must generally do so within 90 days. The court may confirm a plan over creditors’ objections if the business commits its projected disposable income for three to five years. Unlike regular Chapter 11, the owners can keep their equity without paying unsecured creditors in full.
