Business Debt Relief: A Complete Guide in 5 Decisions for Small Business Owners

Business debt relief starts with a hard truth: if you signed a personal guarantee, you’re still personally responsible for any debts you guarantee, regardless of what happens to the company. The way out comes down to five decisions: which debts are really yours, what to do about an SBA loan, whether to settle, whether the business should file bankruptcy, and whether you should.

A personal guarantee is a promise made by an individual that if the company does not pay, the individual will pay. Not every creditor debt, though, is a guaranteed debt. So the very first question to ask yourself is whether the debt is personally guaranteed or not. Start by looking at the papers you signed when the debt was incurred. A guarantee in a private agreement often comes as a part of a long form, hard to read, single-spaced document. Guarantees aren’t all equal. Most are unconditional, meaning the creditor does not have to first go after the business or its collateral before going after you, but a few are conditional. Likewise, many guarantees are “joint and several”, meaning that each guarantor can be liable for the full amount of the debt. If you’ve signed guarantees, gather them all up and list the details in a spreadsheet.

Guarantee creditors can sue, win a judgment, take any assets that aren’t protected by exemptions, such as bank accounts, investments, home equity, vehicles, in some states wages, and if you gave a mortgage on your house as collateral for the loan, the lender has rights in your house as well. Lenders often ask for both spouses’ signatures on a guarantee even if only one spouse is running a business or doing the work. If your spouse co-signed on any of the debts, your spouse has liability too. It’s a bad idea to shift assets out of your name into the name of another person. Creditors and the bankruptcy court can undo transfers of assets made while you are insolvent, and doing so can cost you a bankruptcy discharge. Your liability for debts is personal and is not reduced merely because your assets are in another person’s name.

SBA Loans

SBA loans almost always have a personal guarantee by the business owner, and frequently have collateral such as the family home. The borrower is required to repay that loan, even if the business fails, if a personal guarantee was made. For 7(a) loans, SBA requires a personal guarantee from every owner of 20% or more of the business. For COVID-era EIDL loans, the personal guarantee is required if the loan is more than $200,000, and loans above $25,000 are secured by a lien on business assets.

Unpaid SBA loan balances can be referred to the Treasury Department. Treasury typically adds around 30% in collection costs. Treasury is permitted to garnish wages, withhold federal benefits, pursue a tax refund, and it does not need to obtain a court judgment to garnish up to 15% of your wages. If the business operated as a sole proprietorship, the debts of the business are the debts of the owner, guarantee or not.

If the business closes down, guarantors of SBA loans can sometimes, once its assets have been liquidated, enter an Offer in Compromise process with SBA to reduce the amount of the guaranty. SBA’s COVID EIDL hardship plan ended on March 19, 2025, but EIDL borrowers can still ask for six months of half payments. The debt is not forgiven.

Negotiate Settlements

You may not need to file bankruptcy to get a fresh start. Many creditors will accept reduced balances in return for ending the creditor relationship. If you have not filed for personal or business bankruptcy and you have guaranteed debt, you are often able to negotiate settlements. Your leverage with the creditor depends on the assets you have that they can access, and on the assets that bankruptcy would exempt. The amount of money a bank will accept in return for giving you a settlement release depends on the facts of the case.

If the company is still going, it may be worth working to preserve the business, and if you’ve been able to maintain personal savings, you may be wondering if you should use that savings to keep paying a guaranteed loan. It’s tempting to keep fighting, to keep paying. I’ve seen business owners trying to do the right thing by paying back what they feel they owe, with the result that they’ve spent personal funds on repaying debts with money that they’d have been allowed to keep in bankruptcy. In a later bankruptcy, the trustee can look at all your assets and ask where any money you may have spent on a creditor went. For these reasons, it’s important to take advice before you do it.

When debts are forgiven, or settled, the difference between the face amount of the debt and the amount you pay may be taxable income. If you are insolvent, you exclude the forgiven debt from income up to the point of insolvency. You must file Form 982 with your income tax return.

Discharge or Reorganize Business Debts

If the business files bankruptcy, you can’t use the corporate filing to discharge your personal liability. In a chapter 7 liquidation proceeding, only an individual may get a discharge of debt. A corporation, LLC, or partnership does not get a discharge at all. If you guarantee a debt, you remain liable on that debt even if the corporation or LLC is liquidated.

If the corporation or LLC is still a going concern, the business itself can reorganize to repay its own debt under Subchapter V. Subchapter V applies only if total debts are no more than $3,424,000. If the business reorganizes, the owner’s guarantees stay in place. But if a creditor of the business is being paid under the confirmed plan, why would it bother you as guarantor to pay more? To file a plan to reorganize the business, you have 90 days after the case is filed. You can’t simply file a case and wait to see how it goes. The business must be prepared in advance.

You may be able to discharge or reorganize business debts and a claim under a personal guarantee, in an individual bankruptcy case. As an individual, you can discharge unsecured debts in chapter 7 bankruptcy, even if you have signed a personal guarantee. A person may keep some assets in chapter 7 bankruptcy, but not everything. The means test may apply. It does not apply if debts are primarily business debts. Bankruptcy will not eliminate any lien against your home unless it is dealt with separately.

You may also reorganize in chapter 13 bankruptcy, even if you have guaranteed business debt. In a chapter 13, you, as an individual debtor, can reorganize or “adjust” your debts through a three-to-five-year chapter 13 plan. Keeping assets and repaying debt over time is at the core of what chapter 13 bankruptcy is about. Chapter 13 works only if your debts are under a certain amount. If you’re considering reorganization, but your debts are larger than the chapter 13 debt limits, you have the option of using chapter 11 to reorganize.

Take a complete financial inventory of your business and of you and your spouse. Find out which debts you personally guaranteed. Find out what assets are exempt from collection if a creditor sues and what you and your spouse would get to keep in bankruptcy. Be aware of what you would lose. Decide if you have more to gain by fighting, or by settling, or by filing bankruptcy.