Options for Business Debt: 6 Routes to Assess Before You Commit

If your business is in debt, there are really six options. They are, from lightest to heaviest: an SBA 7(a) loan, an IRS payment plan, an IRS offer in compromise, Subchapter V bankruptcy, Chapter 11, and Chapter 7. The right choice depends on whether the business is still viable, how much debt it has, and to whom, plus your own risk tolerance. Assess all of these before you commit.

One of the simplest options is an SBA 7(a) loan. With a 7(a) loan you can refinance existing business debt of up to $5 million. An SBA 7(a) might be for you if your business is otherwise healthy and just needs more lenient terms to stay in the black.

If the debt is withheld payroll taxes you will want to act sooner rather than later, as an officer who willfully fails to pay can be personally liable for the full unpaid amount. Trust fund taxes have their own simple payment plan. You can set up a trust fund tax installment agreement if you owe $25,000 or less and the balance can be paid in full by the collection statute expiration date. Beginning in July 2026 the IRS changed some of the rules. Business trust fund payment plans no longer need a set term or direct debit.

An offer in compromise settles tax debt for less than owed. Make sure you meet the eligibility requirements, as the IRS will charge a $205 fee even if the offer is denied. A lump-sum offer needs 20% of the offer upfront. You cannot get an offer if your case is open in bankruptcy. If you have a low income you can waive the initial payment and the user fee; however, you cannot waive the payment or fee on an offer for a business.

When you hear that some debts can be forgiven it is easy to think of it as a pure win. However, a write-down is still generally taxable income. The exceptions are bankruptcy and insolvency, but these reduce loss carryovers and basis in certain cases. Still consider it, but plan carefully, and fill out Form 982 if needed.

Subchapter V

A lot of people don’t know that there is a lighter bankruptcy, but there is. Subchapter V allows your business to operate while protecting it from creditors. The requirements are that total debts cannot be more than $3,424,000, and over half of them must have arisen from running your business.

The idea of Subchapter V is to make small business bankruptcies more affordable and less burdensome. A few of the ways it does this are by bringing in the help of a trustee to work with all parties for a consensual plan, having a quicker plan deadline of just 90 days after filing, and usually not requiring the debtor to file a disclosure statement. It also stops the U.S. Trustee from charging quarterly fees. Only the debtor, meaning you, may file a plan of reorganization. The court also holds a status conference within the first 60 days, and you usually will not have an unsecured creditors’ committee. If all your projected disposable income will go toward plan payments, a plan is generally considered fair even if it lets you keep equity and doesn’t fully repay all creditors. But, as a fairly new procedure with little precedent there’s no promise that any particular plan will pass court review.

Chapter 11

Chapter 11 suits a business that is fundamentally sound but has unsustainable debt. You can keep running your business while seeking bankruptcy. Unlike many bankruptcies, Chapter 11 lets the debtor operate as a “debtor in possession.” On filing, the automatic stay halts most collection efforts and lawsuits. Two of the greatest Chapter 11 powers are the ability to reject burdensome leases and contracts and the resulting leverage to lower rent. Commercial leases are generally either kept or rejected in just 120 days (with a possible 90-day extension), and a landlord’s claim becomes unsecured and probably worth much less, so landlords have extra incentive to negotiate a positive result. The court can also revalue collateral, with any debt above the collateral’s value becoming unsecured debt.

There are downsides, too. Impaired creditors vote on whether to approve the plan, or it can become a cramdown in which the court forces them to accept it. Under absolute priority, senior creditors must be paid in full before junior creditors or owners get anything. Sometimes the process can take several years. Creditor committees may oppose the plan. There’s a $1,738 filing fee and attorneys’ and advisors’ fees will mount up.

Chapter 7

If a business cannot be saved, then the cleanest option is a Chapter 7. In a Chapter 7 the owner no longer runs the business. A trustee appointed by the court sells the non-exempt business assets, and uses them to pay creditors in full or to the limit of the funds. You generally receive nothing from this. Note that a corporation or LLC does not get a discharge. Even though you aren’t the corporation or LLC itself you still can get sucked into paying if you signed a personal guarantee of the debt. Another type of debt that goes right past the business entity is any trust fund taxes it collected. Fraud debts also stay with individuals.

It is best to look at the whole picture before picking a debt solution. First take into account how the business is going overall. Is it too weak to survive on its own? Are most of the debts IRS? And last, how much can the business afford to put toward debt?