Debt Relief for a Business Owner: 7 Options Sorted by Whose Debt It Is

How you respond to your business’ debts depends on whose debts they are - - the company’s alone, yours personally, or both because you signed a personal guarantee. So step one is sorting every debt into one of those categories. Once you know who the debt is actually owed by, you can work out your specific options.

If you operate a corporation or limited liability company (LLC), generally debts of the business are debts of the business only, not personal obligations of any owner, shareholder, or member of the LLC. Sole proprietorships are not a separate entity. They are the owner. If you never bothered to set up an LLC or a corporation, you’re a sole proprietor. If you jointly own a business with another person or persons, you may be jointly liable on any debts of the business.

As the owner, in some circumstances, you may be personally responsible for the debt. For example, the agreement for the company debt may have included your personal guarantee. Creditors often ask you to personally guarantee the business’s debts. Personal guarantees can also be required by business suppliers and vendors as part of their conditions for providing credit or supplying a service. If you are the person responsible for the credit card account, not the business, you’re most likely personally liable for the debts on the card. Sometimes even though you didn’t guarantee the debt, a court might hold you personally liable under the business’ obligations. This can happen if, among other reasons, you have mingled your funds with those of the business so that no one can tell which is which.

Seven Main Ways Out of Your Company Debt

There are three for debts owed only by the company, two for debts you owe personally, and two for tax and SBA debt. If the debt is a debt of the business only, how you deal with it depends on whether the business itself is still viable.

If the business continues to operate, negotiate repayment terms with the creditor. The business may be able to make smaller payments over a longer period. Or it might be able to convince a creditor to write off part of the debt and pay the remainder as a lump sum. Some creditors are better positioned than others. If you stop making payments to the creditor holding a lien on the business’ equipment, it can repossess or foreclose on the collateral. And if it’s a vendor you depend on to stay in operation, think about how their reaction could impact your future orders and payment terms.

Or, if the business is still viable, you may be able to reorganize under Chapter 11 Subchapter V of the Bankruptcy Code. Subchapter V is available for small business debtors with debts up to $3,424,000 for cases filed on or after April 1, 2025. Only the debtor may file a plan of reorganization, and it must be filed within 90 days.

If the business has no real future, sell assets, close the business in an orderly fashion and pay off as many debts as possible. If the business is a corporation, LLC, or partnership, it can’t get a Chapter 7 bankruptcy discharge - - only individuals get Chapter 7 discharges.

If you personally guaranteed the debt and the business can’t pay it, then you’re personally liable. For example, if you personally guaranteed that the business would pay the rent, you’re liable on that debt. Your options for dealing with your personal liability are much like the ones available to the business. Try negotiating for an alternate repayment schedule with the creditor, or a full or partial settlement. While you’re negotiating, keep in mind that cancellation of a debt is taxable as income, except to the extent you were insolvent (your liabilities were more than the value of all your assets) right before the cancellation. Talk to a tax professional about how it works, and if you decide you were insolvent, report that on IRS Form 982.

You may want to close the business, but that doesn’t end debts you are personally liable for. If the debt is not fully repaid by the business, you may be able to file a Chapter 7 case to discharge your personal liability, leaving the business debt in place. And if you’re a sole proprietor, a personal bankruptcy can include both business and consumer debts. There are rules and exceptions, of course. Bankruptcy’s automatic stay generally protects only the person who files the bankruptcy case. In most cases that means that other co-owners, guarantors, and the company itself have no bankruptcy protection. The bankruptcy also may not protect any collateral.

For tax debt, the IRS can seek personal liability and recovery of the Trust Fund Recovery Penalty from any person responsible for collecting or paying over withholding taxes and who willfully failed to do so. The penalty is 100% of the unpaid trust fund taxes. A 60-day letter of proposed assessment gives notice and allows the person an opportunity to appeal. File a timely appeal if you receive such a letter.

You may be able to set up a long-term payment plan (monthly automatic debit) over the phone, by mail, or in person. The setup fee is $89. Interest and some penalties keep adding up until the tax debt is paid in full. You can request an Offer in Compromise (application fee $205, plus first payment). If you’re low income, the IRS waives the fee and first payment. But that low-income waiver is for individuals only -- businesses can’t use it.

If you have a loan through the Small Business Administration (SBA), eligible COVID Economic Injury Disaster Loan (EIDL) borrowers can temporarily cut their payments by 50% for six months, but the interest keeps accruing. So you’ll end up with a bigger balloon payment. The SBA disaster loan hardship accommodation plan ended March 19, 2025. Neither the old nor new plan cancels the loan debt. Ignoring an SBA loan that’s been referred to Treasury can be risky. Once it gets there, the Treasury can garnish up to 15% of a debtor’s disposable pay without going to court.

Make Notes About Each Debt

Gather every piece of paper about the business’s debts and your own debts. Separate out the ones that are or might be the responsibility of the business only, you only, and you plus the business. Make notes about each debt - - who signed for it, whether you gave a personal guarantee, what collateral, if any, secures the debt, and if there’s a lawsuit or judgment. Don’t pay off the person who yells the loudest - - read your contracts and guarantees first. Then you’ll know where you and your business stand.