Debt relief achieved by a U.S. small business without the filing of a bankruptcy petition can be done by way of negotiated settlements with creditors, as a part of a debt relief program offered by a business’ lender, or by liquidation of the business as allowed by the applicable state law. None of these involve a stay against collection activities such as a bankruptcy petition and therefore do not restrict the collection rights of a non-complying creditor. All are available to a company depending upon the specific circumstances, which can include the amount of debt for which a business owner is personally liable, the amount of tax or federal government debt, a comparison of a company’s assets versus liabilities and the salvageability of a company.
The owner’s personal exposure should be dealt with first. An LLC or corporation normally insulates the owner from business debts. A personal guarantee, on the other hand, makes an owner responsible for a specific loan, and many bank loans, leases and merchant cash advances require them. Payroll taxes are an even stronger exception. Under Internal Revenue Code section 6672, the Internal Revenue Service can levy a penalty equal to 100% of the income tax and employee Social Security and Medicare taxes that a business withheld from wages but failed to remit. The penalty may be assessed against any responsible person who acted willfully. Courts view knowingly using business funds to pay other creditors before the government as willful.
Negotiated workout. The primary vehicle for the non-bankruptcy survival of a business is a negotiated workout. Unsecured creditors may be willing to compromise and accept less than full payment of their debts if they think that the business cannot pay them in full. A settlement represents some recovery, without the expense of a lawsuit. The payment could be in a lump sum, at a discount; or spread out over time, at a lower rate. (A composition is a similar arrangement, where a group of creditors agrees to receive a fixed percentage of its claims.) The language in the release is as important as the amount. It should release guarantors and any assignee or servicer that might subsequently try to collect on the debt. Only the creditor who agrees to a settlement is bound by it. Other creditors may still sue and recover.
Canceled debt of a business generally is taxable income. A lender that forgives debt of $600 or more must file Form 1099-C. The borrower is still required to pay taxes on smaller amounts. Section 108 of the Internal Revenue Code excludes canceled debt from gross income to the extent that the taxpayer is insolvent. A taxpayer is insolvent if the amount of liabilities immediately before the cancellation is greater than the fair market value of all assets, including retirement accounts. In an Internal Revenue Service example, a person who has liabilities of $10,000 and assets of $7,000 is insolvent by $3,000. If $5,000 is forgiven, then $3,000 is excluded and $2,000 is taxable. The exclusion is reported on Form 982, which reduces tax benefits such as net operating losses. Canceled debt in bankruptcy is excluded without an insolvency limitation.
The SBA is reducing the hardship accommodation for the COVID Economic Injury Disaster Loans. The SBA discontinued the Hardship Accommodation Plan for COVID Economic Injury Disaster Loans, which provided payments as 10% of the minimum payment for 6 months, effective as of March 19, 2025. The new relief plan provides for a 50% reduction of minimum payment for 6 months and can be only availed once every five years. To qualify for the relief, the loan must be less than 90 days delinquent, the business must be in operation, and the hardship must be temporary. The interest will continue to accrue, and the balloon payment will increase. The SBA is no longer offering offers in compromise with COVID Economic Injury Disaster Loans, report practitioners.
Falling behind on an EIDL has fast consequences. The SBA says an account may be referred to the Treasury Offset Program after 120 days of delinquency, which lets the government withhold federal payments owed to the borrower. Federal regulations generally require agencies to move debts that are 180 days delinquent to Treasury’s Cross-Servicing program. Once an EIDL is there, the SBA no longer services it, and the borrower deals with Treasury directly. Treasury can add collection costs to the balance, and law firms handling these files report fees of roughly 28 to 30 percent. For an EIDL borrower, the time to negotiate is before the 120-day mark.
Merchant cash advances need to be looked at separately as not all merchant cash advances are what they seem. A merchant cash advance is structured as a sale of future sales rather than a loan in order to avoid usury restrictions. An appeal court in New York looked at three factors in a 2020 case, LG Funding v. United Senior Properties of Olathe. The first is whether the contract includes a reconciliation clause where payments are reduced when sales are low. The second is whether the contract has a term length. The third is whether the funder is able to collect the balance even if the merchant files for bankruptcy. A merchant cash advance that is repayable in such a manner that repayment is guaranteed can be considered a loan. In New York, a merchant can argue that they shouldn’t be liable for the debt as it should have been considered a loan and use the criminal usury laws as a defense to an advance that was structured as a loan. Arguments that a cash advance was really a loan can give merchants an advantage in negotiating a settlement for less than the full balance.
The power that ownership had over MCA providers was illustrated in January 2025, when the New York Attorney General announced a $1.065 billion judgment against Yellowstone Capital and its executives. The company’s advances were loans with interest rates as high as 820% a year, the Attorney General said. The outstanding balances of more than 18,000 businesses totaling $534 million were forgiven and unsatisfied judgments ordered vacated. The federal court entered a $20.3 million judgment against MCA operator Jonathan Braun in February 2024 in a case by the Federal Trade Commission over using confessions of judgment to take business and personal assets. In 2019, New York revised CPLR 3218 to bar the filing of a confession of judgment in that state against people who were nonresidents at the time of signing.
Business owners utilizing a business debt settlement company are not afforded the same level of protection as consumers. Under the Federal Trade Commission’s (FTC) Telemarketing Sales Rule, those who offer debt relief services over the phone are prohibited from collecting fees prior to settling a debt. In a 2024 rule, the FTC confirmed the application of the business-to-business exemption to this rule to both sellers and telemarketers. This means that the FTC’s ban on the collection of advance fees generally does not apply to a business. The FTC’s Telemarketing Sales Rule has prohibited material misrepresentations to businesses in business-to-business telemarketing since May 16, 2024. This also includes misrepresentations concerning debt relief.
An assignment for the benefit of creditors is a legal process by which a company liquidates its assets outside of a bankruptcy court. The firm assigns its assets to an assignee of its choice who liquidates the assets and distributes the proceeds to creditors according to state-mandated priority. Assignments are typically governed by Article 2 of the Debtor and Creditor Law in New York. Most assignments end within a few months but can exceed one year for larger, more complex cases. The cost of an assignment is estimated to be between $60,000 and $150,000. An assignment is only practical if the company has valuable assets to sell. Debts secured by personal guarantees survive the assignment, which means these debts remain the responsibility of the owner.
An out-of-court settlement is not an option when:
· the company has been sued by creditors · the company has debts to too many creditors to negotiate debt one at a time · the company needs a court order to stop creditors from collections.
If you have less than $3,424,000 in debt (as of April 1, 2025) and own a small business, you can reorganize through Subchapter V of Chapter 11. In September 2026, Congress passed H.R. 7730 (the Bankruptcy Threshold Adjustment Act) to permanently raise the debt ceiling for Subchapter V cases to $7.5 million with subsequent three-year inflation adjustments. As of early October 2026, the Act is still awaiting the President’s signature. If you have debts in this amount below and above, the Subchapter V debt ceiling may have been raised. Check before making the decision to reorganize your debts through Subchapter V.
