If you have debts in your business, don’t pay those debts in the order the loudest creditor tells you to pay them. You need to know which of those debts are ultimately coming after you personally. So you need to make sure that you protect yourself from them. You need to know whether you can save the business by making a negotiation, whether you need to get into Subchapter V, or whether you just need to go out of business. Most people don’t do this right. They don’t want to upset the merchant cash advance funder that has money taken out of their account every morning, so they let the payroll tax deposit be late. That’s totally the wrong tradeoff. Paying a merchant cash advance funder and not paying payroll taxes is wrong because the payroll taxes can come for you personally.
The majority of the online articles about bankruptcy and debt relief miss one important fact about Chapter 7. According to 11 U.S.C. 727(a)(1), the bankruptcy court can only grant a discharge to an individual. A corporation or LLC filing chapter 7 won’t get a discharge. The trustee sells all the company’s assets and the case is closed. All of the company’s debts you personally guaranteed are still fully collectable from you. The bank loan, the equipment lease and the cash advance are all due and payable with your signature on the guaranty. In order to eliminate the personal guarantee, the guarantor must file for bankruptcy. Before looking at the business’s options, separate all of the debts into piles. Label each debt as secured or unsecured. Label each debt as guaranteed by you or not. Separate taxes into their own pile. As many owners discover, the sorting process reveals that the real question is whether the owner needs bankruptcy, not the company.
The Owners Suffer the Most
The Owners Suffer the Most The law requires businesses to withhold income taxes and the employees’ share of Social Security and Medicare taxes from the employees’ wages. You are holding the IRS’ money. If you don’t deposit these amounts timely, then you are personally liable for “trust fund taxes” if you are considered a “responsible person” who “willfully” failed to make those deposits. Internal Revenue Code section 6672 details the Trust Fund Recovery Penalty. Business owners and officers can be responsible persons. Anyone who makes decisions about what bills to pay can be a responsible person. “Willful” does not mean evil intent under the tax law. You are “willful” if you pay other creditors when you knew the withheld tax was due to the government.
Paying the rent, a supplier, or a lender rather than the withheld tax is a classic example. The Ninth Circuit affirmed this type of personal liability in March 2025 in Dreyer v. United States. Dreyer is important because the Ninth Circuit held a board chair personally liable. Simply claiming that you were trying to keep the business open is not a defense.
Pay withheld payroll taxes before other creditors. Pay them before the advance funder and the vendor you’ve paid for ten years. Paying the IRS before the vendor that keeps you in business seems wrong. Pay the payroll taxes, though. Do not favor those you know best when the business is failing. This is the other pitfall that people fall into. If the owner lent money to the company last year, it’s easy when things are going poorly to covertly repay himself. Or pay off the one loan your brother-in-law guaranteed. The bankruptcy law allows the bankruptcy trustee to sue to recover money paid on old debts within ninety days of filing a bankruptcy, pursuant to 11 U.S.C. 547. For “insiders,” this is extended to one year. “Insiders” include officers, directors, family members, and “controlling” persons.
The bankruptcy law simply presumes the business was insolvent for 90 days before filing, so the trustee does not have to prove that the business was broke when the check was issued. The trustee can sue the recipient to recover the amount he was repaid. If your business is on the brink of insolvency, stop making payments to insiders this week, not next month.
You Can Choose a Path
Once you know which debts are personal, you can choose a path. Negotiating directly with creditors makes sense when a few creditors hold most of the debt and you can show them a believable repayment plan. Litigating costs creditors money, so in our experience banks, landlords and suppliers agree to longer terms or a reduced payoff in a large share of cases. Negotiating these workouts is our firm’s work, and it succeeds more often than owners expect.
I’ll be blunt about the weakness of negotiation, because settlement companies’ sales pitches usually aren’t. A private workout gives you no automatic stay. Any creditor who refuses to settle can still sue you, freeze your accounts, or keep debiting your operating account during talks. A settlement firm cannot stop a lawsuit or a levy. Forgiven debt can also count as taxable income. A settlement that looks like a great deal can come with a tax bill, so plan for one.
If the funding source is a merchant cash advance (MCA) funder, with an arrangement that automatically debits payments from the business’s daily bank account, that changes things. Merchants can have actual leverage in dealing with an MCA funder, since some MCA contracts are open to challenge in court. In January 2025, New York’s Attorney General secured a $1.065 billion judgment against Yellowstone Capital and affiliates. The Attorney General alleged that Yellowstone Capital’s transactions, which were sold as purchases of future revenue, were in fact loans. The Attorney General cited fixed daily debits and rates as high as 820% APR. An 820% APR rate on a $10,000 advance would equate to $82,000 in annual charges. The judgment discharged $534,552,724 owed by more than 18,000 businesses. The judgment also mandated a $16.1 million payment.
In February 2024, the Federal Trade Commission secured a $20.3 million judgment against Jonathan Braun of RCG Advances following a jury verdict. The judgment also prohibits Jonathan Braun from working in the merchant cash advance industry on a permanent basis. The FTC alleged that Jonathan Braun had improperly used confessions of judgment. As of August 30, 2019, New York also prohibits the filing of confessions of judgment in New York against out-of-state debtors.
The Yellowstone and Braun cases show the terms of the MCA funder’s contract are contestable. This is a point of negotiation. Have someone read your existing contract before signing a new one to renew your last advance. Subchapter V Chapter 11 is designed for small business. Use Subchapter V Chapter 11 if you can’t negotiate because too many creditors are up in your business, or if one creditor is taking money out of your bank account. You qualify for Subchapter V Chapter 11 if your total debts, on the date of your bankruptcy filing, were $3,424,000 or less. At least half of your debts must be business debts. If your total debts were $2 million, at least $1 million has to be a business debt. Single asset real estate debtors are not allowed to use Subchapter V Chapter 11. Subchapter V Chapter 11 lets the business continue to operate, and the automatic stay stops collections.
Subchapter V is practical for small businesses. The court will always appoint a trustee. Only the debtor can file a plan, so creditors can’t force a plan. The court appoints a creditors’ committee only on cause. The court will only require a disclosure statement if the court thinks it is necessary. The court schedules a status conference within 60 days. The debtor must file a plan within 90 days from the order for relief. That’s not a lot of time so you should have all your financial numbers ready before you file. The court can confirm your plan over creditors’ objection if your business commits its projected disposable income for three to five years. Owners retain their equity in many Subchapter V cases.
The Subchapter V debt limit is an open question. The old debt limit was $7.5 million. This limit expired on June 21, 2024. According to the American Bankruptcy Institute, 1,475 potential debtors lost their chance to use the Subchapter V process due to the expiration of this limit. Congress passed H.R. 7730, the Bankruptcy Threshold Adjustment Act, in September 2026. It is not a law. As of early October 2026, it is awaiting the President’s signature. If he signs this bill, the debt limit will be $7.5 million for the indefinite future. The limit will be adjusted every three years. The timing of your filing can determine if you are eligible to file for Subchapter V if your debts are between $3,424,000 and $7.5 million. Check the status of the bill during the week you file.
I would not bet on the $7.5 million debt limit applying to your case if you file before the bill becomes law. The demand for Subchapter V is clearly rising. Debtors filed 1,663 Subchapter V cases during the first half of 2026. That’s compared to 1,107 cases during the first half of 2025.
Subchapter V Costs Real Money. Chapter 11 costs $1,738 just to file. Chapter 7 costs $338 just to file. In most cases, attorney’s fees will be significantly more than those filing fees. You will also need your current balance sheet, statement of operations, cash-flow statement, and federal tax return. If you don’t have all of those, you will need to provide a sworn statement as to why not. Closing Down Is Sometimes the Honest Answer. If you’re losing money even before you pay your debts, then there’s no way restructuring will fix those losses. A restructuring would just stretch out payments for a business that takes in less money than it pays out. If you close your business, go back to the first question. Which debts will follow you? Do you need your own bankruptcy case to resolve those debts?
Sole proprietors are special. In a sole proprietorship, the owner and the business are the same entity. One bankruptcy case can resolve business debts and household debts. Call your payroll provider and make sure you are current on all the taxes you have withheld from your employees and owe to the government. Pull all the guaranties you have signed. Stop making all payments to you and your family. Now that you have the real numbers in front of you, you can decide whether you need a negotiator or the automatic stay of a bankruptcy filing.
