Business debt settlement is possible in 2026, but it isn’t right for every business or every debt. Business debt settlement is ideal when a business is profitable once its debt is taken care of, a business has mostly unsecured debt (like merchant cash advances, online business loans, business credit cards, vendor debts, etc.), and when a business has the ability to pay a lump sum or have a monthly payment plan for a short period of time. Business debt settlement is not ideal when a debt has collateral that a lender is interested in, when a debt has already been taken to judgment by a creditor, or when a business is losing money even when there are zero debt payments. In this last scenario, business debt settlement is merely a postponement of the inevitable.
A settled debt means that a creditor is willing to accept less than what is owed and forgive the remainder. The creditor does this because he knows that he’s getting more than he would if he sued, collected on a judgment, or waited in line in a bankruptcy.
The creditor is not required to accept a settlement. Normally in settlement programs the business ceases payments and collects cash. As the cash is being accumulated, late charges and interest continue to build up, the damage to the credit continues and a lawsuit can be filed.
You can find out how much a settlement actually costs by looking at consumer programs. Fees are usually 15 to 25% of the debt, the program lasts two to three years, and according to one industry study, consumers who had settled at about half their balances saved 30% after fees.
For an owner, the most important document is usually the personal guarantee. Most merchant cash advance contracts and many small-business loans make the owner personally liable. A settlement that releases the LLC but not the guarantor leaves the owner’s home and bank accounts exposed. Bankruptcy for the company alone does not solve this. Under Section 727(a)(1) of the Bankruptcy Code, only individuals receive a Chapter 7 discharge. A corporation or LLC that liquidates in Chapter 7 does not have its debts discharged, and the owner’s guarantee stays enforceable. Any settlement agreement should name each guarantor and each affiliated company it releases.
Second, business owners don’t have the same federal protections as consumers do regarding the employment of a settlement company. Debt relief companies that use the telephone to solicit debts are prohibited from collecting any fees before settling a debt under the FTC’s Telemarketing Sales Rule. That rule has been in place since 2010. However, the rule was originally written to cover consumer debt, and business-to-business calls are largely exempt from it. In rule amendments published in April 2024, the FTC expanded the prohibition of deception (for example, misrepresenting what services will be provided by debt relief companies) to apply to business-to-business calls. However, the FTC did not clarify whether it had also expanded the prohibition on upfront fees. As a result, a business debt settlement company could, theoretically, collect upfront fees in a situation where a consumer debt company would not be permitted to.
Federal enforcement: In November 2024, the FTC sued Seek Capital, a company that promised fast funding to new small businesses, who allegedly opened credit cards in business owners’ names without their permission. The FTC said Seek Capital had caused more than $37 million in harm to business owners. In November 2025, Seek Capital and its CEO, Roy Ferman, agreed to a permanent ban from offering business financing, debt relief, and credit repair, as well as a $48 million judgment (most of which was suspended due to lack of ability to pay). Promises of large savings: In July 2025, the FTC closed down an operation called Accelerated Debt, which allegedly promised to reduce debt by 75% or more.
The contracts are the merchant cash advance owner’s main negotiating power. Merchant cash advances are structured as a sale of future sales, not a loan, so they are not regulated by the usury laws. Courts consider whether the “reconciliation clause” that adjusts the payment down when sales go down is real, whether the transaction is fixed-term or ongoing, and whether the funder can collect from the guarantor in bankruptcy. In Fleetwood Services v. Richmond Capital Group, from June 2023, the Second Circuit affirmed a lower court decision that a merchant cash advance was actually a usurious loan and affirmed damages under the civil RICO statute. Courts are split. In January 2026, the Georgia Court of Appeals reversed a lower court’s usury decision because the reconciliation clause in the contract was real.
In January 2025, the New York Attorney General obtained a $1.065 billion judgment against Yellowstone Capital and its affiliates. It voided over $534 million in debt from over 18,000 small businesses and more than 1,100 court judgments after determining that effective rates reached 820%. In February 2024, a federal jury trial for the FTC against merchant cash advance operator Jonathan Braun led to a $20.3 million judgment, including $3.4 million in redress and almost $17 million in civil penalties. A funder with a contract like this is more likely to settle.
Confessions of judgment are another part of the deal to watch out for when you are looking at offers, and can vary by state. A confession of judgment is a signed document which allows a creditor to obtain a judgment against a debtor without a lawsuit. After the amendment to CPLR 3218 by the State of New York on August 30, 2019, a creditor may no longer file a confession of judgment in New York courts against a business owner who is not domiciled in New York. If a New York confession was filed after August 30, 2019 against an out-of-state merchant it may be challengeable. A New York merchant remains subject to the process. Once a judgment is in place, the creditor can freeze accounts. The owner has little negotiating power.
In general, paying back less than you owe yields taxable income. If a business pays back $400 on a debt for $1,000, the $600 saved is usually counted as ordinary income. This will be income reported on a sole proprietor’s schedule C, E, or F. Creditors are required to file a form 1099-C if the amount of debt forgiven was $600 or more. This income must be reported even if the form isn’t filed. There are two main exceptions to this rule. One is if you cancel debt in bankruptcy. Another exclusion occurs if you were insolvent immediately before the cancellation of debt, and the amount you can exclude is the amount of liabilities that exceed the fair market value of assets you had immediately before cancellation of the debt. Both exclusions are claimed on Form 982, and they reduce tax attributes such as net operating losses dollar for dollar.
The other major alternative to settlement is Subchapter V of Chapter 11. Subchapter V also limits creditors’ settlement demands. Subchapter V was passed by Congress in February 2020, and is intended to provide a faster reorganization process for small businesses. To qualify, since April 1, 2025, a business must have fixed, undisputed debts of $3,424,000 or less and at least half of its debts must be from business activity. Debts owed to insiders and affiliates are not counted towards the limit. A $7,500,000 limit was temporarily in place, but expired on June 21, 2024. Congress passed the Bankruptcy Threshold Adjustment Act of 2026 on September 28, 2026, which would permanently return the limit to $7,500,000. As of early October 2026 the bill is awaiting the President’s signature and it would only apply to cases filed on or after the date of enactment.
Back to the business. It’s important to get some answers to some questions.
First, how profitable is the business before paying its debts? And what percentage of its debts are unsecured, secured and tax?
Second, are there any judgments or confessions of judgment against the company?
Third, what are the debts with a personal guarantee and what is the amount that can be made available for lump-sum cash settlements?
Fourth, what is the total amount of debt because that will tell you whether or not the business can qualify for Subchapter V (as a back stop).
Fifth, is the business owner insolvent on the date of the settlements so that the discharge or cancellation of the debt will not be taxable income to the owner?
