Bankruptcy Help for a Business: 6 Sources and What Each Can Do

If you are thinking about bankruptcy as a business owner, there are six places to turn to for help. They are a bankruptcy attorney, filing without a lawyer, free legal services, a nonprofit credit counseling agency, a debt settlement company, or advice from the IRS or Small Business Administration. Which one to use depends on what type of business you have.

Bankruptcy Lawyers

A corporation is legally a separate entity from the owners. It requires separate representation from an owner’s representation. The filing of corporate bankruptcy can be done only by an attorney. Bankruptcy lawyers are helpful when choosing between Chapter 7 and Chapter 11 filings. Chapter 7 is for asset liquidation. Chapter 11 is used for reorganization of debts. When a corporation files Chapter 7, its nonexempt assets are liquidated. It is not released from its debts.

But a Chapter 11 bankruptcy doesn’t necessarily cause a business to stop operating. Usually the owner who filed stays on, managing the business. A trustee is rarely appointed to take over management. That usually happens only when serious fraud is alleged or if there is gross mismanagement of the business. Subchapter V, the small-business form of Chapter 11, is for debts of $3,424,000 or less, and at least half must have come from business operations. There is a bill to raise the limit to $7.5 million which has passed the House and Senate but, as of mid-October 2026, is not yet law. Costs for Chapter 11 bankruptcy vary, but start with a $1,738 court fee: $1,167 to file plus $571 in administrative fees.

The same attorneys who file bankruptcies for business owners can also negotiate with creditors without filing a bankruptcy case. The simple fact that a business owner qualifies to file gives them leverage to get better repayment terms from creditors. Bankruptcy is a powerful bargaining chip because it shows the creditor what it would get in a case. If a lawyer contacts a collector for a client, the collector must generally communicate with the lawyer. If a creditor files suit, the lawyer can defend the client against it.

If a creditor refuses to stop collecting, a debtor’s lawyer can file a bankruptcy petition. A petition stops nearly all creditors automatically with the injunction of an automatic stay. However, a lump-sum payment within 90 days before filing can often be grabbed back, as a “preference.” It’s one year for payments to relatives or a business partner. And if the lender gives up any of a loan balance, the borrower must generally pay income tax on it. Whether debt relief is taxable income depends on whether debts are canceled in a bankruptcy or in a creditor compromise. Debt wiped out in bankruptcy is generally not taxable. If the debt is written off when a person is insolvent, the Internal Revenue Code allows some of it to be excluded.

Filing Bankruptcy by Yourself

If you do not have enough money for an attorney to file for you, you can file as an individual or sole proprietor without a lawyer. The process of filing bankruptcy by yourself is called “pro se”. All business entities require an attorney.

Sole proprietors use the same forms as individuals, the 100 series. Before a bankruptcy case is filed, an individual is required to participate in credit counseling within the 180 days before filing. Only a nonprofit agency that is approved by the U.S. Trustee for the debtor’s district may be used.

If you cannot afford a lawyer, you may qualify for free legal help. Where to look is not obvious. Several U.S. courts point to the ABA Legal Help Portal and the Legal Services Corporation.

Debt Settlement Companies

A debt settlement company is usually not a law firm, and it cannot represent you in court. You typically stop paying your bills, and you deposit money every month into an account. Debts are settled one by one. Debt settlement companies can get a lump-sum payoff. Late fees build up and creditors can sue before their cases are settled. For debt settlement fees, services commonly charge from 15 to 25 percent of the debts enrolled, which can come to thousands of dollars. You may not realize that if you pay for debt relief over the telephone, the law usually bars a payment from being required until a debt is settled. Some clients later drop out, or get very few, if any, debts settled. Any debt relief is often reported on Form 1099-C. If a $20,000 debt is settled for $8,000, the forgiven $12,000 is often taxable.

The IRS and SBA also have programs to help out in specific situations. The Chapter 11 discharge does not wipe out the employer’s responsibility to pay over withheld Social Security and employee income tax withholdings. To check whether the IRS received notice of your case, call the IRS Centralized Insolvency Operation at 800-973-0424. You will need your case number. If you have an SBA loan, the SBA said in January 2024 its free or low-cost Resource Partners may help fit repayments into a budget. It tries to bring borrowers back into compliance before escalating collection.

Sometimes negotiating a settlement of debts is simpler, but often bankruptcy can be better. Where bargaining fits best is with a few big creditors and a steady paycheck to support the payments, or if a lump sum is available. Where bankruptcy might work better is when there are too many creditors to fight off at the same time, for protection from lawsuits, or when the tax on forgiven debt would be large. Whichever path you choose, use the first session to find out whether bankruptcy is an option for you, so you know whether to factor bankruptcy into your discussions with other professionals.