2026 Negotiate with business creditors Negotiate with creditors individually. Prioritize them based on their impact on the business and your personal lives. Then develop a personalized written offer to them that is affordable to the business with its current cash flow. Most creditors will agree to a discount in balance or deferred payments if they feel that they will have to spend more on collection expenses or because the business is likely to be closed or you are likely to file bankruptcy. Leverage is provided by a realistic financial statement and a plan if they do not accept the offer. You need to make 4 decisions: Which creditors to pay first, lump sum or installment payment plans, how you affect your personal guarantee and if you file reorganization instead of dealing with them directly.
Payroll taxes come before every negotiation. The income tax withheld from employees’ paychecks and the employees’ share of Social Security and Medicare are held in trust for the government. Under Internal Revenue Code section 6672, the IRS can hold any responsible person personally liable for the full unpaid amount of those trust fund taxes. That includes owners, officers, or anyone with authority over which bills get paid. Willfulness is easy to show. If an owner knows the payroll taxes are unpaid and pays vendors or lenders instead, that alone can be enough. The employer’s matching share is not part of the penalty, but the trust fund portion follows the owner even after the business closes.
Next, sort the remaining creditors by how much leverage each one has. A lender with a recorded lien on equipment, receivables, or inventory can usually go after that collateral after a default. An unsecured supplier usually has to sue first. Personal guarantees cut across every category. If you signed one, a settlement with the business does not end your personal liability unless the agreement says so in writing. Many owners are also surprised to learn that the federal Fair Debt Collection Practices Act does not protect them. Section 1692a(5) of that Act covers only debts taken on mainly for personal, family, or household purposes. A commercial collector therefore owes no federal validation notice, and any protection has to come from state law or the contract itself.
Merchant cash advances can be a different ball game, and maybe their Achilles Heel is the idea that the agreement is not what it purports to be. In January 2025, the New York Attorney General announced a $1.065 billion judgment against Yellowstone Capital and its affiliates. The state alleged that the advances were disguised loans, with annual percentage rates of up to 820%. More than $534 million in loans to more than 18,000 businesses were canceled, more than 1,100 court judgments vacated, and UCC liens surrendered. Similarly, in a Federal Trade Commission case against RCG Advances, the 2022 order enjoined the defendant and its owner from the business, and vacated judgments entered against its customers. If the advance is a fixed payment that cannot be reduced and is payable regardless of whether there is any revenue, then it can be argued that it is a usurious loan.
Confessions of Judgment – The next major MCA risk is a confession of judgment. A confession of judgment is an agreement that a creditor may enter a judgment against a debtor without a court action. In August of 2019, New York amended CPLR 3218 to require that the confession of judgment can only be entered in the New York county of the debtor’s residence. This change in law ended the widespread practice of confessions against businesses out of state from New York. A New York business can still be subject to a confession of judgment, and funders have been moving to other states, so it all depends on the location of the business and when the confession is signed.
Good Offer An offer should look like a business plan. Include the recent profit and loss statements, recent bank statements, a schedule of your debts and their balances and terms and a cash flow projection. You will then propose a reduced lump sum payment or temporary interest only payments or longer payment schedule (depending on your ability to pay). Get the agreement in writing signed before you pay. It should spell out the amount you will pay, the dates you will pay, a release of the business and any guarantors and a promise to release any liens and dismiss any actions. Trade creditors whom you will want to continue working with usually will prefer a longer payment schedule. Creditors who have already charged off the debt will be more likely to accept the reduced lump sum payment.
Forgiven debt can create a tax bill. Under IRS Publication 4681, a cancelled balance generally counts as income. The IRS’s own example: if you pay $400 to settle a $1,000 debt, you have $600 of cancelled-debt income. Banks and other applicable lenders must file Form 1099-C when they cancel $600 or more, and they use code F when the cancellation came from an agreement. Smaller cancelled amounts can still be taxable even if no form arrives. The main relief is the insolvency exclusion, claimed on Form 982. It applies only to the extent your liabilities exceeded the fair market value of your assets immediately before the cancellation, and claiming it can reduce other tax benefits you would otherwise keep.
If you’re likely to go bankrupt, you may want to reconsider how and when you pay someone. A bankruptcy trustee can generally claw back payments that favored one creditor over another under 11 U.S.C section 547. For the 90 days before bankruptcy filing, or full year for “insiders” (owners, officers and their family members), payments can be clawed back. The business is presumed insolvent during that 90-day period. Payments under a certain amount are protected. If the business case is filed on or after April 1, 2025, a bankruptcy trustee can’t make a preference claim against a creditor for less than $8,575 in the aggregate. Payments back to an owner or hustle to pay off a debt that you personally guaranteed may leave you and the creditor liable for a clawback claim.
The business can use a tool in subchapter V of chapter 11 that will force creditors to make trade-offs. A business can use subchapter V if it was filed on or after April 1, 2025 and its qualifying debts do not exceed $3,424,000. Half of the business’s debt must be related to the business. Only the business can file a plan in subchapter V and it must be due within 90 days. Creditors committees are rarely appointed, and a standing trustee assists the parties in reaching an agreement. A business can have a plan approved without the creditor’s consent if it promises to pay its projected disposable income for three to five years. Owners can maintain their ownership in the business. In September 2026, Congress passed H.R. 7730 to increase the limit to $7.5 million on a permanent basis. The bill is awaiting the President’s signature as of early October 2026, and it applies only to cases filed after the date the bill is signed into law.
Your Creditors Know These Rules The more that a creditor can recover from your Subchapter V plan than they can under your private offer, the less incentive a creditor has to accept your private offer. The less that a creditor can recover from your Subchapter V plan than they can under your private offer, the more incentive a creditor has to accept your private offer. Government Lenders are the Least Flexible Debtors with SBA EIDL loans now have less formal ways of reducing their payments as the SBA has removed its Hardship Accommodation Plan for COVID Economic Injury Disaster Loans as of March 19, 2025. Requests to modify and reduce payments for SBA EIDL loans will now be filed via the SBA’s COVID EIDL Servicing Center.
