Bankruptcy Attorney or Settlement Help: 5 Questions That Determine the First Call

If you are behind on debts, the decision of who to call first generally comes down to five questions. The most important one asks if a creditor is already suing the company, garnishing its bank accounts, or levying (seizing) cash assets. If it is, a bankruptcy attorney comes first because only filing stops it. If creditors are still willing to talk and the company can find enough money to pay lump sums, debt settlement comes first.

Once the company files its bankruptcy petition, the automatic stay takes effect. The bankruptcy “automatic stay” stops (suspends) attempts by creditors to collect debts that arose before filing. It gives a company a little time to regroup and negotiate. Certain types of legal actions are not put on hold. The stay is a temporary shelter, not a permanent shield. A secured lender can ask that the bankruptcy court modify or “lift” the automatic stay to permit it to foreclose on or sell the collateral. They are likely to do this when the debtor has no equity in a property they are entitled to reclaim or repossess, especially if the property is not needed for reorganization.

While a debt-settlement company may try to negotiate with creditors to accept lump sums to satisfy the debt, it has no legal power to make them participate in its process or stop other collection efforts. A creditor who refuses to negotiate or reaches an impasse with the business can still take legal action, such as suing to collect and securing judgments with which to garnish wages and lien its assets.

The second most important question is, how is the company organized? If the business structure does not set up a separate legal entity for the company, a bankruptcy filing is personal. That means a sole proprietorship or other structure without its own legal identity is the same thing as a bankruptcy filing in the individual owner’s name. If a corporation files for bankruptcy, stockholders risk losing the value of their stock only, not their other assets. In addition, under certain circumstances, the debts of partnerships are the responsibility of all the partners, and a creditor may seize their individual assets. Only individuals can receive a discharge under Chapter 7 bankruptcy, so a corporation or partnership can file and go through the process without one.

How Much the Company Owes

The third most important question is how much the company owes. Subchapter V of Chapter 11 is a smaller, cheaper, and faster Chapter 11 bankruptcy option for small businesses. To qualify, a company must not owe more than $3,424,000 on the date the company files for bankruptcy. Secured and unsecured debts are included in the calculation. At least half the debt must be from commercial activity. As of October 14, 2026, Congress passed a bill raising the limit to $7.5 million, but that has not been sent to the President or enacted yet. Only individuals can file for Chapter 13. If a business owner files individually for Chapter 13, they must have regular income. Unsecured debts cannot exceed $526,700, and secured debts must be under a cap.

The Business Needs to Keep Operating

The fourth most important question asks if the business needs to keep operating. Chapter 11 bankruptcy allows a business to continue to operate while paying its debts off over time. An owner usually stays in control during a Chapter 11 reorganization. As “debtor in possession,” the business continues operating and may borrow new money, but it must get court approval. In Subchapter V, only the debtor can file the plan and has 90 days to do it. The law requires a trustee in every Subchapter V case. Courts charge $1,738 to file for Chapter 11 bankruptcy and $338 for Chapter 7. Individuals filing bankruptcy also generally need to have received a briefing in credit counseling within 180 days before filing. There are a few limited exceptions to this requirement.

Staying in business while filing for bankruptcy requires paperwork. In Subchapter V, the company must attach a balance sheet, cash-flow statement, and federal tax return. It must give reports to the court and U.S. trustee regarding its financial operations every month. Failing to file required documents can be a ground for converting the case to Chapter 7.

Who the Creditors Are

The fifth most important question asks who the creditors are. Not all debts or creditors are the same. Certain federal government-backed debts, such as SBA loans, are generally referred to the Treasury Department for collection within 120 days of becoming delinquent.

As for settlement help, the Federal Trade Commission ban on companies collecting up-front fees for debt-settlement companies applies to companies who advertise help settling debts for businesses. In the settlement company arrangement, what the company pays is often less than the face amount of the debt. The IRS considers the difference “income,” and the forgiven debt amount is generally taxable as income. Certain debt can be excluded from debt forgiveness income if the lender cancels it in a bankruptcy or to the extent the debtor is insolvent. Usually, excluding it reduces tax attributes. If you exclude cancelled debt from income, report it on Form 982.

If there is room to negotiate and a willingness on the part of the company’s creditors to talk, a debt-reduction deal is worth trying first. If creditors refuse to deal or take action to collect the debts, a company likely needs to call a bankruptcy attorney first.