Settling Business Debt
A company can settle almost any debt it owes for less than what it owes. As long as the company can convince the creditor to do so. This depends on the type of debt. Debt Settlement is a contract. There is no requirement for a creditor to discount a debt. The easiest ones to settle are private unsecured debts such as: business credit cards, vendors, online loans, back rent on a commercial lease, and merchant cash advances. These creditors have little recourse if a business shuts down or files bankruptcy. Secured loans and government debts are harder to settle. Each has their own process. Some debts cannot be discounted and written away in a private settlement, like those that are owed personally or require approval outside of the contracting parties. The most common of these are payroll taxes withheld from employees and wages.
If the private debt is unsecured, the business owner’s first choice is whether the business can access a lump sum. Debt settlement companies often claim they can negotiate settlements of between 30 and 70% of the total amount. However, these companies are selling a service. No one can make guarantees about results. And negotiations don’t freeze the collection process. If a creditor sues and obtains a judgment, it can levy bank accounts and place liens during the process. Debt settlement programs that tell business owners to stop paying and instead deposit money into a special account are taking a risk that creditors will pause their actions, but some will not. Unsecured debt settlements should be agreed upon in writing and confirm that the payment settles the account in full.
How much of a settlement will be offered for secured debt depends on the collateral involved. If a business owner obtained a bank loan on a certain truck or piece of equipment, the owner will have little chance to settle a loan for less if the business still has the piece of equipment. Secured lines of credit that a bank gives to a business may require that a business owner turn over business assets to the bank before negotiating. The less value a creditor sees in the collateral, the more likely the settlement will be without taking the collateral. Business owners who plan to return equipment back to a lender may be able to negotiate a price on the balance before returning the equipment. All debt will be affected by personal guarantees. A creditor that holds a personal guarantee on a business debt has the right to pursue the business owner’s personal assets for the debt. Settling business debt without a personal release of the guarantee may leave owners exposed.
If the settlement does not include a release of the guarantor, the guarantor may be held liable. Merchant cash advances are one of the most negotiable debts. This is especially true given that regulators have targeted the industry. In January 2025, the New York Attorney General obtained a $1.065 billion judgment and settlement against Yellowstone Capital, its officers and its affiliates. New York claimed that the company issued disguised loans to over 18,000 small businesses. Instead of taking a genuine percentage of the sales, the company took fixed payments from their bank accounts regardless of their performance. Yellowstone Capital neither admitted nor denied the allegations against it. It has agreed to forgive over $534 million in outstanding balances, vacate unpaid court judgments and permanently exit the merchant cash advance business.
Some merchant cash advance agreements include a confession of judgment. It is a document that the merchant signs in advance which enables the funder to get a court judgment against them without filing a lawsuit. On August 30, 2019, New York amended the CPLR 3218 so that a confession of judgment can only be filed in the county where the debtor lives or, for businesses, where the business conducts business. Funders are no longer able to use New York courts against out of state merchants with no business presence. The law changed after a report stating that cash advance companies had obtained over 25,000 such judgments totaling approximately $1.5 billion in the last four years. However, businesses in New York are still exposed to the practice and states like Pennsylvania and New Jersey still allow the use of confessions of judgment.
IRS Offer in Compromise Program
LLCs and corporations can pay their federal tax debt using the IRS offer in compromise program. The corporation, LLC, or partnership will use its own Form 656. It cannot use the individual’s offer in compromise. The corporation will have to fill out Form 433-B (OIC) for financial information. The application fee is $205. Individuals are eligible for the low income waiver, but businesses will not be able to request the waiver. A 20% payment of the offer in compromise will be required upfront for a lump sum offer in compromise. The rest of the payment can be made into five or fewer payments after the offer is accepted. Employers must be up-to-date on their federal tax deposit payments for the current quarter and the previous two quarters. The business must file all tax returns. An offer in compromise is considered accepted if the IRS has not made a decision on the offer within two years. An offer in compromise can be appealed within 30 days of it being rejected.
Trust Fund Recovery Penalty Under Section 6672
There’s also personal liability for payroll taxes. The IRS can assess a trust fund recovery penalty under section 6672 of the Internal Revenue Code. It’s equal to 100% of the income tax, Social Security tax and Medicare tax withheld from the employees but not remitted. It applies to any responsible person who willfully failed to pay over those taxes. It can include officers, owners and bookkeepers who have check-signing power. The employer’s match portion is not included. Incorporation or an LLC won’t protect a person from this penalty, which survives the demise of the business. The owner who settles the company’s tax debt still has to consider the IRS’s options against his or her personal assets.
COVID-era Economic Injury Disaster Loans (EIDLs) are close to unsettleable for businesses that are still operating. The SBA’s Hardship Accommodation Plan, which cut payments by up to half for six months, closed on March 19, 2025. The SBA says COVID EIDLs can’t be forgiven. It considers an offer in compromise only after all collateral securing the loan has been sold off. In September 2025, the SBA resumed sending delinquent COVID EIDLs to the Treasury’s Cross-Servicing program. That program adds collection costs and doesn’t send debts back to the SBA. An August 2025 report by the SBA’s inspector general counted more than $47 billion in charged-off COVID EIDLs with balances above $25,000.
Another example of a case that may not be privately settled is unpaid employee wages. In Cheeks v. Freeport Pancake House, a 2015 case in the US Court of Appeals for the Second Circuit regarding overtime violations brought against a pancake house in Long Island, the court found that private settlement with prejudice, meaning final, of FLSA claims by the parties are not permitted, and court or Department of Labor supervision is required. Some courts, such as the Fifth Circuit, permit some private settlements. One federal district court in New York found that a pre-lawsuit settlement did not need approval.
Generally, debt forgiveness is taxable income. If a creditor cancels a debt of $600 or more, it generally must report it on a Form 1099-C, but the cancellation is income even if no form is received. Section 108 of the Internal Revenue Code offers two significant exclusions. First, the entire amount of the cancellation is excluded if it occurs in a bankruptcy case. Second, if the cancellation occurs outside of bankruptcy, it may be excluded to the extent the business was insolvent, that is, the amount by which its total liabilities exceeded the fair market value of its assets immediately before the cancellation. Claiming the exclusion requires the filing of a Form 982, and it generally reduces other tax attributes such as net operating losses and the tax basis of assets. For a partnership, the insolvency test is applied to each partner.
Subchapter V
Bankruptcy affects all negotiations as it provides a way to bind holdout creditors, which would never agree to the terms of the negotiation. Subchapter V of Chapter 11 created by the Small Business Reorganization Act of 2019 provides a more rapid and less expensive procedure to reorganize businesses with debts below a limit. To qualify, at least half the debts must be incurred by the business. The current limit as of April 1, 2025 is $3,424,000. The Congress has approved H.R. 7730, the Bankruptcy Threshold Adjustment Act, which would permanently set the Subchapter V limit at $7,500,000, indexed every 3 years. As of October 1, 2026 the bill is awaiting the President’s signature.
However, as a business owner, one cannot be as protected by federal law as a consumer when dealing with debt settlement companies. As of October 27, 2010, the Federal Trade Commission Telemarketing Sales Rule forbids for-profit debt relief companies who sell their services through phone calls from charging upfront fees to consumers who are seeking settlement of unsecured consumer debt. The ban on upfront fees does not apply to business to business telemarketing sales calls. Hence, a debt relief company may legally require its business customer to pay upfront. As of May 16, 2024, only the Telemarketing Sales Rule ban on material misrepresentation has been extended to business to business telemarketing, including about debt relief services. Thus, a business owner who hires a debt settlement company and pays the company in advance generally has to rely on the contract and state law.
