Settle Unsecured Business Debts for Less than the Full Amount
In general, yes, you can settle unsecured business debts for less than the full amount. Like any negotiation, settlement is a negotiation. There’s no law saying that your vendor, credit card company, or merchant cash advance company must accept less than you owe them. A creditor only accepts less than the full amount due if the alternative is worse. The alternative may be that the business is closing down and there is no hope to recover the debt at all. The alternative may be a long drawn out court case or the bankruptcy of your business, in which case there may be little or nothing for the unsecured creditors to recover from the bankruptcy. Creditors may accept 50 to 70 cents on the dollar or less for unsecured debts if the business is closing down.
Companies that specialize in debt settlement offer to negotiate debts for between 30 to 60% of the balance. Depending on who signed the debt, who owns the debt, and how much cash you have available for lump sum settlement offers, you may or may not be able to settle your debts at all.
Who Is Personally Responsible for the Debt
The first question is who is personally responsible for the debt. A debt owed only by an LLC or corporation generally stays with the company, so an unpaid creditor may have little recourse against the owner. Many business credit cards, credit lines and cash advances, however, come with a personal guarantee, which makes the owner liable as well. When a guarantee exists, a settlement only helps if the written release covers both the company and the guarantor for the entire balance. Without a signed release for the full amount, the creditor can still sue for the remainder. A sole proprietor has no separate entity at all, so the business’s debts are the owner’s personal debts.
Fewer Collection Protections
Business borrowers have fewer collection protections than consumers. The federal Fair Debt Collection Practices Act, defined at 15 U.S.C. § 1692a, reaches only debts taken on mainly for personal, family or household purposes. The Consumer Financial Protection Bureau states plainly that the Act does not cover business debts. A personal guarantee of a company loan is generally treated as a business debt too. Some states fill part of that gap. New York’s FAIR Business Practices Act took effect on February 17, 2026. It lets the state Attorney General pursue unfair and abusive practices that harm businesses as well as consumers. Private lawsuits under the New York law are still limited to deceptive conduct.
Hire a Debt Settlement Company
Businesses are legally allowed to hire a debt settlement company, however, they are not afforded the same federal consumer protection as a consumer to the fees paid to the debt settlement company. The Federal Trade Commission’s Telemarketing Sales Rule forbids telemarketing companies offering debt relief services from charging any fees until they successfully negotiate and close at least one of the client’s debts, and that the customer completes a payment under that agreement. The Telemarketing Sales Rule almost entirely exempts telemarketing for business-to-business transactions. An FTC amendment in 2024 merely extended the bans on deceptive practices for telemarketing for business-to-business calls. A national debt settlement company states fees range from 15-25% of enrolled debt with programs lasting between 24 to 48 months. The company states the average customer saves 45% before fees, and 20% after fees if they complete the program.
The FTC has gone after companies that target small-business owners. In FTC v. Seek Capital, filed in November 2024 in federal court in California, the agency alleged that the company promised business loans but instead charged owners thousands of dollars to open credit cards in their names. The FTC put owners’ losses at more than $37 million. A final order entered on October 1, 2025 permanently bans Seek Capital and its CEO from offering business financing, debt relief and credit repair services. It imposes a $48,280,328 judgment, partly suspended because the defendants could not pay it.
The usual settlement method carries real risk. Under that approach, the business stops paying and saves cash for lump-sum offers. Missed payments can lead to lawsuits, judgments and liens on business and personal assets before any deal is reached. Merchant cash advance contracts add another hazard, because many include a confession of judgment that lets the funder get a judgment without winning a lawsuit first. New York amended its confession statute, CPLR 3218, on August 30, 2019. Confessions can now be filed only in the county where the debtor lives or has a place of business, which effectively bars filing them against out-of-state businesses. New York businesses are still exposed to confessions of judgment.
Debt from merchant cash advances may be more negotiable because of challenges that can be made to the contracts themselves. On January 22nd, 2025, New York’s Attorney General Letitia James announced a $1.065 billion judgment against Yellowstone Capital and 25 other companies. The Attorney General’s office claimed that Yellowstone presented its advance agreements as purchases of future receivables but took fixed daily payments from the advances, resulting in effective annual rates of up to 820%. The settlement cancelled $534,552,724 that was owed by more than 18,000 small businesses. It also required the companies to cease collection activity and drop pending cases and vacate unpaid judgments. Whether an advance is a disguised loan or not depends on the terms and it can also impact the amount a funder is willing to take.
Debts Owed to the Federal Government
Special provisions exist for debts owed to the federal government. The $25,000 or less EIDLs issued for reasons connected to the COVID-19 pandemic were not subject to any requirement to give collateral or personal guarantees, but the other EIDLs were all subject to blanket liens filed by the SBA. The SBA does allow submission of an offer of compromise to the agency on SBA Form 1150 with a sworn financial statement on SBA Form 770. Practitioners state that offers to compromise the COVID EIDLs are “rarely” accepted. The SBA generally must refer a loan that has been charged off to the Treasury Department’s Cross-Servicing program and any other person who is liable on the loan after the SBA has charged off the loan unless collection of the loan is barred, for example, by compromise or discharge in bankruptcy.
Canceled Debt Income
The amount forgiven is generally considered taxable. If you cancel the entire debt or your creditors accept less than the full amount of the debt, the canceled debt is considered ordinary income. For instance, if you owe $1,000 and you settle with your creditor for $400, then you have $600 of canceled debt income. Form 1099-C is filed by reporting creditors for cancellations of $600 or more, but must be reported whether or not you receive the form. There are several exclusions, the most important of which is the insolvency exclusion, which applies if you were insolvent (your liabilities exceeded the fair market value of all of your assets, including retirement accounts) immediately before the cancellation. Taxpayers may utilize their insolvency to exclude canceled debt income by filing Form 982.
For example, in one of the IRS’ examples, a taxpayer was insolvent by $12,000 and had $20,000 of debt canceled. The taxpayer could exclude the $12,000 and would have to pay tax on the remaining $8,000.
The business’s tax structure decides whose finances count for the insolvency exclusion. For a partnership, Internal Revenue Code § 108(d)(6) applies the exclusion at the partner level. Each partner reports a share of the canceled-debt income, and only an insolvent partner can exclude it. A solvent partner pays tax on that share even if the partnership itself was deeply insolvent. For an S corporation, § 108(d)(7) applies the exclusion at the corporate level, and only the taxable remainder passes through to shareholders. Excluding canceled debt also has a cost: the taxpayer must reduce tax benefits carried forward to future years, starting with net operating losses and then general business credit carryovers.
Subchapter V
Bankruptcy is the last resort alternative to settlement, and also is the incentive for the creditor to negotiate. A bankruptcy discharge is not taxable. Subchapter V of Chapter 11 of the Code allows a small business to remain in business and pay debts with a plan of reorganization. Only the business may submit the reorganization plan, which must be filed within 90 days of the bankruptcy filing. The court assigns a trustee to administer the case, but a creditors’ committee is only appointed for cause. The court may confirm the reorganization plan even against the objection of creditors, if all of the debtor’s projected disposable income is committed to the plan for three to five years. (As of April 1, 2025, Subchapter V is now available only to businesses with total debts of $3,424,000 or less, of which at least one-half must be from business.)
This limit may soon more than double. H.R. 7730, the Bankruptcy Threshold Adjustment Act, was passed in the House by voice vote on September 16, 2026, and passed the Senate on September 28. As of early October 2026, the bill is being considered for signing by the President. This bill would permanently set the Subchapter V limit at $7,500,000, with inflation adjustments every three years. It would replace the separate $526,700 unsecured debt and $1,580,125 secured debt limits in Chapter 13 with a single $2,750,000 limit. These new limits would only apply to cases filed on or after the date the bill was signed into law. A business that has more than $3,424,000 in debt and files before this date cannot use Subchapter V.
