Small Business Debt Relief: 5 Tests for a Sustainable Plan

Unexpected financial difficulties or big changes to your small business can leave you with too much debt and too little credit. Small business debt relief can take the form of cheaper interest rates and better terms, lower monthly payments and longer payment periods, or full or partial debt forgiveness. However, not all debt relief options are right for all kinds of debt or for your particular circumstances. You have no business doing a debt relief deal if it’s the wrong type for your debts, if it costs too much or risks too much, if you can’t sustain the payments, or if it runs afoul of a government creditor. There’s a lot more to debt relief plans than lower payments; be sure you can deal with the many downsides along with the possible upsides before agreeing to the deal.

One debt relief scheme might suit your needs perfectly, but give you no benefit if your debt is a different kind. A plan that lets you cut credit card balances might be great for all those high-interest consumer debts, but won’t be worth anything if your business has a big equipment loan and no credit card debt. Debt is not debt is not debt. Unsecured debt such as credit card balances or merchant cash advances is the easiest type to settle, because the lender has no collateral to fall back on if you file for bankruptcy. Secured debts are trickier. The lender can seize collateral if you miss payments, sell it for whatever the market will bear and then hold you liable for the rest. However, the rest can be negotiated.

Lenders differ in their flexibility with debt settlements. The Small Business Administration, which guarantees many business loans, rarely grants forgiveness for any amount, whereas credit card companies have more room to bargain. Typically, $7,500 is the threshold where a settlement is worth the effort.

Cash Flow

Do a budget and see what money you’ll have left after meeting expenses and paying your debt plan. Stretching out loan terms or rolling all your debts into one loan could reduce your monthly outlay and raise your cash flow, but a new monthly payment for several years still means money out the door and something you need to plan for. Your cash flow must have room for it, or you’ll just find yourself slipping farther into debt by failing to keep up with your plan. If you choose settlement, you will have to deposit a monthly amount that you can afford into a separate dedicated account that you own and control. Settlement programs typically last from two to four years, but how long yours will last depends on how much you can deposit into your dedicated account every month. The quicker you build up an offer, the sooner you can submit it. You might get your first settlement within months of starting.

Debt settlement plans can lower your debt load over time, but they do carry risks and downsides. The usual procedure for debt settlement is to stop making payments to your creditors. Those missed payments have negative impact on your credit score. Also, a creditor can sue you for debts, whether you’re on a settlement program or not. But that does not mean that a settlement is impossible. There’s often some room for bargaining. Your options depend on several factors: your entity type, or whether it was a “sole proprietorship” or an LLC; the nature of your financing, such as a personal guarantee; and whether you pledged any personal assets to back the debt, such as your home. An LLC or corporation helps shield personal assets, but a ”personal guarantee” can erase those limits. You should consider seeking advice from a licensed attorney.

The Small Business Administration and the Internal Revenue Service

The Small Business Administration and the Internal Revenue Service have programs for debt relief, though some of these take the form of better terms or deferring payments temporarily, rather than reducing what’s owed. An SBA offer in compromise is a formal request for debt reduction or partial debt forgiveness. To settle a 7(a) loan for less, your lender needs the SBA’s written approval, because the feds are guaranteeing the loans. You can make your offer by submitting a Form 1150, or another signed written offer, with supporting documentation. The deal is usually settled by one lump sum, due within 60 days. For EIDL debt, the Covid Hardship Accommodation Plan ended March 19, 2025. Borrowers can now get 50% lower payments for six months. At the IRS, an offer in compromise, which the IRS calls an OIC, is an offer to settle a debt for less than the amount owed. There’s no guarantee your application will be accepted. If you don’t qualify for an offer in compromise, you may still be able to arrange a payment plan with the IRS to pay back what you owe via monthly installments. Since Dec. 2025, if you are an active business owner who owes trust fund taxes for up to $25,000, you can arrange a payment plan with the IRS.

All the Expenses Involved

A large debt reduction or low interest rate may look great on the surface, but there are other factors you should consider. Be certain you understand all the expenses involved before agreeing to the deal. The IRS generally views forgiven debt as taxable income, even amounts under $600. There are exceptions: If you discharge debt in bankruptcy, or are considered insolvent at the time the debt is forgiven. A debt settlement can hurt your score and your ability to borrow. Under the FTC’s rules, a debt relief company selling its service by phone can’t charge you anything until it has settled a debt for you, your creditor has accepted the deal, and you’ve made at least one payment to the creditor. Look for a debt settlement program that avoids upfront fees.

If none of these strategies works for you, Chapter 11 bankruptcy might be worth investigating. Your business may continue operating while you propose a plan to reorganize the debt. The Bankruptcy Code has a program known as ”Subchapter V” which is designed to reorganize the debts of small businesses using a more streamlined process. To be eligible, a small business debtor must be engaged in business or commercial activities and have no more than $3,424,000 in total debt. At least half the debt must be incurred for business purposes, not personal ones. If the creditors object, the court can still confirm the plan as long as the plan proposes that all projected disposable income go to payments for three to five years.

Doing the math on the details of your expenses, debts, and cash flow will help you decide which strategy makes the most sense to pursue. Attacking a mountain of debt is easier with the help of a financial planner or debt consultant. The expert will review your overall financial position -- cash flow and all debt -- not just focus on one problem. If a company pressures you to sign or doesn’t explain its fees clearly, trust your gut and walk away.