There are virtually no debts that a business is legally prevented from negotiating. The creditor can choose to accept less money than it is owed. So what’s the dividing line for a small business owner in 2026? Some debts can’t be negotiated in a private deal and must be taken to a government process with predetermined rules. And other debts can be negotiated but will survive bankruptcy, so the creditor will have little motivation to negotiate them. Those are taxes, criminal fines and restitution, and debts incurred by fraud. Secured loans, SBA loans, and personally guaranteed debts can usually be negotiated, but only on whatever terms the collateral, the business closing, or personal finances can bring.
The IRS Can Assess the Trust Fund Recovery Penalty
4. Of all the business debts, payroll taxes are the most likely to follow the owner personally. Federal income tax and the employees’ portions of Social Security and Medicare taxes that a business withholds are considered “trust fund” money. Under Internal Revenue Code section 6672, the IRS can assess the Trust Fund Recovery Penalty against any responsible person who “willfully” failed to pay over the taxes. The penalty is 100% of the unpaid trust fund amount. The “responsible person” is anyone with actual authority to make decisions about which debts to pay — not someone who merely has a title. The term “willfully” is usually understood to mean knowing payment of other bills in preference to the IRS. More than one person may be potentially liable for the total amount of the penalty, but the IRS cannot collect the total amount more than once.
Trust fund penalty cases continue to make their way to the court. In March 2025, the Ninth Circuit upheld the penalty against a school board member and chairman in Dreyer v. United States, for the school’s failure to pay its employment taxes. The IRS sends Letter 1153 proposing the penalty. The recipient has 60 days to respond by asking the IRS Independent Office of Appeals for a hearing. If the recipient does not respond within 60 days, the recipient forfeits the chance to contest the penalty administratively before assessment. Trust fund taxes and sales taxes are generally nondischargeable when they were collected but not remitted. The portion of a credit card loan or debt used to pay a nondischargeable federal tax is nondischargeable under Bankruptcy Code section 523(a)(14).
Tax debt can still be reduced, however, only through the IRS offer in compromise program and never through a private settlement company. The business files Form 656 along with the business financial statement, Form 433-B (OIC). A nonrefundable $205 filing fee applies for each application. The low-income waiver available to individuals is not available to businesses. Twenty percent of the offer amount is due upfront with a lump-sum offer-in-compromise, with the remainder to be paid in five or less installments within five months after acceptance. A periodic payment offer is paid over a 6-24 month period. An offer in compromise that is rejected by the IRS after the IRS has processed the offer has the fee applied to the tax debt instead of being refunded.
Debts Incurred Through Fraud May Be Negotiable
Debts incurred through fraud may be negotiable, but are not dischargeable in bankruptcy, which puts the card in the creditors’ favor. The Supreme Court, unanimously in 2023, ruled in Bartenwerfer v. Buckley, that a debt incurred through fraud is not dischargeable even if committed by the debtor’s business partner and unknown by the debtor. Bartenwerfer was the co-owner of a house which was renovated and sold with false disclosures and she was left with a judgment of over $200,000. It means for co-owners, in partnerships and other ventures, that a partner’s misrepresentations to a lender, customer, or investor, could result in a personal debt that is not discharged in bankruptcy.
Whether a corporation or LLC can discharge these types of debts in a small business reorganization bankruptcy proceeding under Subchapter V of Chapter 11 depends on where the corporation or LLC files for bankruptcy. The Fourth and Fifth Circuits ruled in Cleary Packaging (2022) and GFS Industries that a corporate debtor in a Subchapter V case cannot discharge these types of debts in section 523(a) of the Bankruptcy Code upon confirmation of its plan over creditors’ objections. On July 9, 2025, the Eleventh Circuit ruled the same way in Benshot, LLC v. 2 Monkey Trading, LLC in a case involving a jury verdict for willful and malicious injury. In 2023, the Ninth Circuit Bankruptcy Appellate Panel held the opposite in In re Off-Spec Solutions. This split may continue until the United States Supreme Court or Congress resolves the issue.
The amount of leverage an owner of a business has in a settlement process is limited by bankruptcy laws. Only a natural person qualifies for a discharge in bankruptcy under Section 727(a)(1) of Chapter 7 of the Bankruptcy Code. If the debtor is a corporation or LLC, the debt isn’t discharged as a result of the company ceasing to operate. The company is dissolved and the guarantors remain liable. As of April 1, 2025, a debtor qualifying for Subchapter V was not allowed more than $3,424,000 of qualifying debt. As of early October 2026, H.R. 7730, the Bankruptcy Threshold Adjustment Act passed Congress and was sent to the President for his review. It would set a permanent debt limit for the maximum amount of debt a business can have to qualify for Subchapter V, that would be adjusted for inflation every 3 years at $7,500,000. As of early October 2026, the President had not signed it.
Will Generally Only Accept an Offer in Compromise
Compromised SBA Loans are uncommon. Normally it is not done while the business is still operating. SBA’s servicing rules (updated in SOP 50 57 4 and as of November 1, 2025) indicate they will generally only accept an offer in compromise after the borrower is out of business and the collateral has been liquidated. Each guarantor to be released from liability will have to provide a personal financial statement, SBA Form 770. The offer in compromise should be a good faith estimate of what SBA can collect through force (e.g. liquidation), should generally be greater than $5,000, and should generally be paid as a lump sum within 60 days of the offer being accepted. The offer is subject to rescission if it was obtained through fraud or misrepresentation. COVID EIDL borrowers who are less than 90 days past due may be eligible for payment assistance (reduce your payments by 50% for 6 months) once every 5 years.
Debt on hold is more expensive. COVID EIDLs are referred to the Treasury Offset Program when 120 days past due. The Treasury Offset Program allows the federal government to confiscate federal payments, such as tax refunds. By federal law, EIDLs are required to be sent to Treasury Cross-Servicing when 180 days past due. At that point, a 28 to 30% collection fee is often added to the total amount owed. The Treasury is also authorized to garnish up to 15% of the borrower’s disposable income. The SBA Inspector General reported in August 2025, there were $47 billion of charged off COVID EIDLs, in 369,588 loans. A temporary waiver allowing the SBA to continue directly servicing loans expired on March 31, 2026.
Entity Protection Fails Most Notably with Secured Loans
Entity protection fails most notably with secured loans and personal guarantees. An equipment or real estate lender can take the equipment or real estate collateral, and the remaining deficiency due after its sale is normally all that can be negotiated. A personal guaranty survives a business’s bankruptcy under the Bankruptcy Code section 524(e), and the dissolution of the LLC or corporation does not terminate the guaranty. The owner who made the guaranty of a lease, credit line, or SBA loan typically only has three ways out of it: negotiate the guaranty directly, pay it, or file personal bankruptcy, which may discharge the guaranty if no fraud was involved in the guaranty debt.
A successful settlement usually leads to a tax bill, as the IRS considers canceled debt ordinary income in the year the debt is canceled, and the creditor may issue a Form 1099-C for it. Debt canceled in a Title 11 bankruptcy case is not included in income. Nor is debt canceled while the debtor is insolvent – liabilities exceed assets – up to the extent of insolvency. To claim either of these exclusions from income, a taxpayer must file Form 982 and reduce certain tax attributes, such as loss carryovers and the basis of assets. For a sole proprietor or a pass-through entity, such income is reported on the personal income tax return of the owner.
