Negotiate Their Debts Without Ever Going Bankrupt
Doing a Workout
Yes. In the US, it is often possible for a small business to negotiate their debts without ever going bankrupt by “doing a workout.” The workout may entail a lump sum payoff of less than you owe. It may entail an extended payback schedule. It may entail both. However, everything is voluntary, creditor by creditor. A creditor can always say no and sue. A court will not stop a creditor from collecting while a workout is under discussion. The chances for success in a workout probably depend on 4 factors: 1) what percentage of the debt is unsecured; 2) how many creditors are involved; 3) whether any have a judgement, lien, or confession of judgement; and 4) whether you have any cash on hand or steady income to offer.
A creditor is willing to take less than full payment if they think that their next best alternative is worse. It is comparing the offer to the next best thing. If they did not get an offer, they would try and collect the money through a lawsuit or bankruptcy case. Secured creditors can take the collateral so they have less incentive to settle. Unsecured vendors, credit card companies, and many merchant cash advance funders have less incentive to try and collect the money without agreeing to a discount. Also, timing plays a factor. A creditor that has a judgement has the ability to freeze bank accounts and garnish receivables so they have less incentive to settle. The percentages that debt relief companies offer are marketing. The percentage would depend on how much the creditor could collect on their own.
The Personal Guarantee
For most owners, the personal guarantee matters more than anything else in a business debt negotiation. A guarantee is a separate contract between the owner and the lender. Releasing the guarantor generally requires the lender’s written consent. Standard guaranty forms usually let the lender compromise with the business without freeing the guarantor, and courts generally enforce those waivers. A settlement letter that forgives the company’s balance can therefore leave the owner fully exposed for the rest. An owner who negotiates should insist that the settlement agreement expressly releases the guarantee. Without that clause, the owner may have paid the business’s share and still owe the remainder personally.
Bankruptcy does not solve the guarantee problem automatically either. Under section 727(a)(1) of the Bankruptcy Code, only individuals receive a Chapter 7 discharge. An LLC or corporation that liquidates in Chapter 7 is not discharged, and its owner’s guarantees survive. Section 524(e) adds that a debtor’s discharge does not change anyone else’s liability for the same debt. In Harrington v. Purdue Pharma, decided in June 2024, the Supreme Court held that a Chapter 11 plan cannot release claims against people who are not in bankruptcy unless the affected creditors consent. A guarantor who wants protection usually needs either a negotiated release or a personal bankruptcy filing.
Canceled Debt
Banks, credit card companies, federal agencies, and other lenders who are in the business of lending money are required to issue a Form 1099-C if they cancel $600 or more in a debt. This income must be reported as ordinary income, unless an exclusion applies. Taxpayers who owed more than the fair market value of all of their assets just prior to debt cancellation can exclude debt forgiveness up to the amount of debt they owed above their assets’ value with the insolvency exclusion. Retirement accounts are considered assets. In the IRS example provided, a taxpayer who owed $3,000 more in debts than the value of their assets and who had $5,000 of debt forgiven could exclude $3,000 and pay tax on $2,000.
It is not costless. The taxpayer files an election on Form 982. The excluded amount reduces certain tax attributes, including net operating losses, credit carryovers and basis in assets. Canceled debt in bankruptcy is excluded under a different provision, which prevails over the insolvency exclusion. It only applies if the taxpayer is in the case personally. Being an owner of a disregarded entity in the case does not qualify. So a negotiated settlement can cost more after tax than the discount. It can be especially costly for a solvent taxpayer with a pass-through business.
Claw Back Payments to Creditors Within 90 Days
A failed business workout could come back to haunt your business when you file for bankruptcy. A bankruptcy trustee can bring an action to claw back payments to creditors within 90 days of a bankruptcy filing (section 547 clawback), if the payments allowed those creditors to recover more than what they would have received in a bankruptcy liquidation. The look back period for payments to insiders (such as an owner paying back her loans to the company) is 1 year. The business is presumed to be insolvent during the 90 day period. There is a defense for payments made in the ordinary course of business. Payments to a creditor under $8,575 total for business debts are safe. A payment to a particularly hostile creditor in full during a workout could be clawed back.
MCA Deals That Affect Negotiations
Businesses that have taken merchant cash advances may have the most leverage to cut a deal. New York’s attorney general obtained a $1.065 billion judgment and settlement against Yellowstone Capital and its affiliates in January 2025. New York accused Yellowstone Capital of charging ‘advances’ with fixed daily payments, which were actually loans with interest rates that were up to 820% a year. Yellowstone Capital was forced to remove $534,552,724 in debt that it was owed by over 18,000 businesses, eliminate any unsatisfied judgments, and was also permanently barred from the industry. The case for an MCA being a loan depends on the contract. If a business has lower revenue and can adjust an MCA payment, the case for it being a loan will be much weaker. If a business owner has a stronger case, it can put them in a much better position to negotiate.
Confessions of judgment are another factor in MCA deals that affect negotiations. These clauses allow a funder to enter a judgment without filing a lawsuit. New York amended CPLR 3218 in August of 2019 to prevent confessions of judgment from being entered in New York against debtors who do not reside or have a place of business in New York. The Federal Trade Commission’s lawsuit against RCG Advances accused the company of abusing these clauses and threatening business owners. They secured an industry ban in June of 2022 and vacating orders against judgments and liens. A federal court ordered the company’s controller Jonathan Braun to pay $20.3 million in February 2024.
EIDL Loan
Coronavirus Economic Injury Disaster Loan borrowers can request half of their normal payment for 6 months once every 5 years. The loan must be less than 90 days past due and the business must still be operational. At 120 days delinquent, the loan can be referred to the Treasury Offset Program. Once a loan is transferred to the Treasury’s Cross-Servicing Program, the SBA will no longer service the loan and will be unable to assist the borrower. In August 2025, an Inspector General report found that 369,588 COVID disaster loans totaling $47 billion had been written off. It is significantly easier to negotiate an EIDL loan before the loan goes over to the Treasury.
Bankruptcy can be used by debtors as a bargaining chip to force creditors to negotiate. Subchapter V of Chapter 11 has made Chapter 11 more attractive to small businesses. A business only has 90 days to file a plan and a creditors’ committee is not required unless the court orders one. A business can keep its equity without paying all creditors in full. A plan can be confirmed over creditors’ objections if the plan provides for all projected disposable income for the next three to five years. A Chapter 11 filing is $1,738, while a Chapter 7 filing is just $338. In the first half of 2026, 1,663 companies filed for subchapter V, up 50%.
The Subchapter V debt limit has been $3,424,000 since April 1, 2025. In September 2026, Congress voted to pass H.R. 7730, which would permanently increase the debt limit to $7.5 million with automatic inflation adjustments every 3 years. As of early October 2026, the bill is still waiting on the President’s signature. The bill only applies to cases filed on or after the date of enactment. A company with a debt between $3.4 million and $7.5 million that is weighing the option of a stalled-out workout or filing for bankruptcy should investigate whether the bill has been signed into law yet. Filing a day before the bill is signed into law could be the difference between gaining access to a faster and cheaper process or not.
