Business Debt Relief in 2026: The Options and How They Compare

If your small business is seriously in debt in 2026, look at refinancing or new loans including SBA relief programs, negotiated settlements with creditors (but remember the forgiven amount is usually taxed). Of particular interest is Subchapter V, a new type of reorganization bankruptcy that targets smaller businesses. Unlike the major Chapter 11 reorganization bankruptcy, Subchapter V filings cap debt levels at $3,424,000 and streamline the process, making it roughly 77% cheaper. Which option fits depends on whether the business can survive if you get the debt problem under control.

You only want to keep operating a business if, after reorganizing debt, you can make enough profit to be worth your trouble. Doing nothing about your business debt has a cost. The human cost takes its toll, as employees leave, customers pick up hints that the company’s future may not be so stable. The suppliers sour on the relationship. You suffer, too, with the weight of worry, of sleepless nights and tense days.

SBA 7(a) Loan

If your business is viable, one option is to apply for SBA 7(a) loan, which can refinance existing business debt. Maximum amount is $5 million. If you also have a COVID EIDL and are struggling with it, you can reduce your monthly payment by 50% for six months, once every five years, so long as your loan is current or fewer than 90 days late. But your interest is still being applied. Any borrower 120 days behind is fair game to be sent to the Treasury Offset Program.

Offer in Compromise

When taxpayers owe the IRS money but can’t pay it off, an Offer in Compromise settles with the government for less than the tax owed. There’s a $205 fee, and certain low-income taxpayers can get it waived. But that waiver is only available to individuals, not businesses. When borrowers propose a lump-sum offer, they must make a 20% payment of the offer with the application.

If your company gets creditors to cut deals, watch the 1099 tax trap. If a creditor forgives all or part of your debt, you must generally include the canceled amount in income. Some debt canceled due to bankruptcy isn’t taxed. Insolvent borrowers can exclude forgiven debt, too, but that exclusion usually reduces their tax attributes, like loss carryovers and the basis of their assets. That’s done on Form 982.

The Only Solution Might Be a Business Bankruptcy Filing

If you are faced with too many creditors and spread too thin on cash-flow, filing may be the way out. Subchapter V helps small-business debtors with debts under $3,424,000, at least 50% of it from business. Filing triggers an automatic stay that stops collections, lawsuits, garnishments and MCA pressure.

Once bankruptcy is filed, you keep running the business. The bankruptcy trustee facilitates the process but does not manage your business. Only you file a plan, and that plan must be presented in 90 days. That 90-day deadline is strict: the court extends it only if the delay comes from circumstances you should not fairly be blamed for. Under the plan, payments in Subchapter V are made for 3 to 5 years.

Unlike Chapter 11, you don’t need creditors to approve the plan. There is no absolute priority rule, meaning you can keep equity in the company. This approach avoids the lengthy disclosure statements required in a chapter 11. In the Northern District of California, average professional fees cost about $146,000 in Subchapter V, versus $646,000 in a Chapter 11. Confirmation took an average of six months compared to 10 months. About 51% of Subchapter V cases get a confirmed plan, versus roughly 25% under the old small-business Chapter 11 reorganization. Among those confirmed, 86% were still in business by late 2023.

However, businesses owing debts over $3,424,000 may be left with a traditional Chapter 11. That carries a $1,738 filing fee. Under Chapter 7, a corporation or LLC gets no discharge.

The key is to distinguish business debtors that are viable, or could be viable if the debt situation is fixed, from those that simply can’t make it. For those in the first category, Subchapter V is something to explore. This approach is meant for viable firms facing lawsuits, several creditors, merchant cash advances or a defaulted EIDL loan. Firms that can’t make enough revenue to cover all their fixed obligations even after reorganization, won’t benefit from Subchapter V.

If you are a sole proprietor and file for bankruptcy, all of your personal and business assets enter the bankruptcy estate. Some assets are protected by exemptions. But those protections vary by state. However, in bankruptcy, 401(k) is protected. What’s not protected is the 401(k) cash-out, because they’re cash now.

Filing for bankruptcy often gets tangled up with feelings of shame, fear and moral failing. But bankruptcy is a business decision. Making it requires basic math, not judgment or embarrassment. Talk to a bankruptcy attorney.