How Companies Restructure Debt: 6 Tools From Forbearance to Chapter 11

When businesses face hard times, you might assume the only solution is bankruptcy, but there are degrees to this that begin with talking. If the shortfall is temporary, lenders may grant a period of forbearance or a payment workout to give management breathing space. If you have a COVID-era SBA loan, the government may reduce SBA Economic Injury Disaster Loan (EIDL) payments to make them affordable. If the debt isn’t affordable, the borrower and lender might agree to settle for less, or an assignment for benefit of creditors might serve as an out-of-court liquidation. If the business has stopped paying and the debt is unsustainable, Chapter 7 or Chapter 11 bankruptcy can preserve or dismantle the operation as needed. The key is to decide whether the debt is temporary or permanent and whether the business can operate at its cost structure.

Hardship Workout

Talk to the bank or other lender as soon as there’s a shortfall. Under a new interagency policy on commercial real estate workouts that took effect in 2023, bank examiners generally won’t criticize a bank for prudent loans, including workouts, even if the modified loan is technically weak. But the bank has to show that it conducted a careful review of the borrower’s finances, so bring your own documentation.

If you’re struggling with a COVID SBA EIDL, the SBA has a hardship option that cuts monthly payments to 50% of the normal amount for six months. You can use it once every five years, but you have to be current on the loan and under 90 days past due, have a business open and owner not in bankruptcy, and the problem has to be temporary. Be sure you have all these ducks in a row.

The catch with a hardship workout is that the payments reduce, not the loan balance. The interest keeps accruing, so the larger the loan and the longer the forbearance, the bigger the final balloon payment becomes. Another drawback is that an EIDL 120 days delinquent can be referred to the Treasury Offset Program.

The bank or lender isn’t the only entity you owe money to. You might be able to reduce expenses and defray losses by negotiating lower payables. The catch is that negotiating reductions is trickier than a workout. You’re not merely rearranging payments, you’re asking to pay less than you owe. If the debt ends up forgiven, the forgiven amount is generally taxable income unless an exclusion applies. Two exclusions that are common are when the debt is canceled in a bankruptcy case or when the debtor was insolvent up to the amount of the insolvency. Claim the exclusion by filing IRS Form 982 with your tax return, and consider getting a tax professional’s help.

Close up Shop, Liquidate

If you’ve exhausted your options and the business just isn’t sustainable, at some point you must decide it’s better to close up shop, liquidate, and concentrate on taking care of your own finances rather than trying to save the business. An assignment for the benefit of creditors is one common method. In a general assignment, you hand the business over to an independent assignee, who sells the assets and distributes the money among the creditors. An assignment isn’t bankruptcy, so there’s no automatic stay against lawsuits or collections. The Uniform Law Commission released a model assignment for the benefit of creditors act in October 2025, but it only applies in states that enact it as law. Because the rules vary from state to state, check local law to learn how an assignment works where you are.

A corporation or limited liability company that’s heavily in debt may have to file Chapter 7 bankruptcy to liquidate it. Although Chapter 7 is the traditional kind of bankruptcy you might think of, Chapter 7 liquidates rather than reorganizes, and the corporation or LLC doesn’t get a discharge. The discharge goes only to individuals.

Chapter 11 Reorganization

If the business is making enough money to operate and pay some of the debt, consider Chapter 11 reorganization, where the owner usually stays in control as the “debtor in possession” and keeps operating while proposing a plan to pay the creditors. That will require significant restructuring of the debt, but it will let the owner keep going and potentially stay in business if it works out.

The reorganization is a formal one, filed in federal court. Filing triggers the automatic stay, suspending collections and forcing creditors to wait their turn and negotiate. That can be a welcome breather for a financially-strapped business. Plan on costs of $1,738 to start, in court fees alone. Creditors vote on the plan by class, and a class accepts only if creditors holding two-thirds of the dollar amount voted, and more than half of those voting, say yes.

But there’s a downside. The complexity of Chapter 11 adds cost, time, and risk. The debtor has to pay a quarterly fee to the U.S. trustee’s office ranging from $325 to $30,000 depending on how much money the business pays out. The debtor alone has the right to file a plan for 120 days, but if the 120 days expire, then any creditor may file a competing plan. Chapter 11 cases can drag on for years. If the process falls apart, the business may end up having to close anyway.

During the case, cash collateral in the business isn’t yours to spend. It’s the secured lender’s collateral, and you need the lender’s agreement or the court’s permission to spend it. New operating money may come from a lender who gets a “superpriority” to put it ahead of other unsecured creditors in line for money, or who gets a lien on assets.

Warning: Payments made in the 90 days before filing, and in the year before filing if made to “insiders” like relatives or officers, can generally be undone and clawed back.

For a small business, the Small Business Reorganization Act lets small companies reorganize under a streamlined, affordable “Subchapter V” of Chapter 11. To qualify, the total secured and unsecured debts must be $3,424,000 or less on the filing date, and only the debtor may file a plan. The deadline to file the plan is 90 days from the filing date unless extended. A trustee is appointed. Another option, but one that has a definite downside, is to confirm a Subchapter V plan without creditor consent. But be careful - there are fairly rigorous requirements, one of which is that you have to commit all projected disposable income to the plan for a minimum of three years or five if the court sets the period.

The key is to start before it’s too late. Some options only work while the loans are still current. Once you fall behind, there’s less you can do.