Business debt relief
Closing a business with debt
What happens to leases, loans, cards and cash advances when a business closes owing money, how a negotiated wind-down compares with Chapter 7 and Chapter 11, and what to do first.
What happens to business debt when you close?
The debt stays. What changes is who can collect it, and from what. A corporation or LLC generally owes its own debts, but personal guarantees, co-signed leases and sole proprietorships put the owner directly in line.
| Debt | What usually happens |
|---|---|
| Secured loans and equipment | The lender can take and sell the collateral, then pursue any shortfall. |
| Office or store lease | The landlord may claim rent still due under the lease and pursue any guarantor. |
| Merchant cash advances | Closing without notice is often a default under the contract. |
| Business credit cards | The issuer pursues whoever is liable, often the owner. |
| SBA-backed loans | Collateral is sold, then guarantors are pursued, then the Treasury collects. |
| Withheld payroll taxes | Can be assessed against the people responsible for paying them. |
Why should withheld payroll taxes come first?
Taxes withheld from employees' pay are held in trust for the government (IRS, opens in a new tab). If they go unpaid, the IRS can assess the Trust Fund Recovery Penalty against the people responsible for paying them, such as owners and officers, personally.
The IRS also says that paying other creditors while those taxes go unpaid can show the willfulness the penalty requires. When cash is short, withheld payroll taxes are the wrong place to find it.
Ask a tax professional about any unpaid payroll taxes before you negotiate other debts.
What does an orderly wind-down look like?
An orderly close deals with the debts in a deliberate order instead of whoever calls loudest. It usually runs like this.
- First
List every debt
Who is owed, how much, what is secured and who guaranteed it.
- Then
Protect what is held in trust
Final wages and payroll taxes, as the IRS closing checklist (IRS, opens in a new tab) describes.
- Then
Talk to secured lenders
Agree how collateral is sold or returned, and what remains owed.
- Then
Negotiate the rest
Payoffs for less, or payment plans, with written releases for guarantors.
Nothing signed without your yes - Last
Close the books
Final returns, canceled registrations, and records kept.
The SBA's guide to closing a business (SBA, opens in a new tab) makes the same points: resolve your financial obligations, file final income and sales tax returns, and notify federal and state tax agencies.
When does Chapter 7 make sense for a business?
Chapter 7 (U.S. Courts, opens in a new tab) is liquidation. A trustee sells what the debtor owns that is not exempt and pays creditors from the proceeds. A corporation or partnership can file, but it does not receive a discharge; only individuals do.
For a company, Chapter 7 is mainly an orderly, court-supervised end. It does not protect owners who guaranteed its debts, it has costs of its own, and the filing is a public record.
A sole proprietor owes the business debts personally, so the bankruptcy choice is a personal one to make with a bankruptcy attorney.
What about Chapter 11?
Chapter 11 (U.S. Courts, opens in a new tab) is reorganization. The business usually keeps operating as a "debtor in possession" and proposes a plan to pay creditors over time. Since 2019, a streamlined version called Subchapter V has been open to smaller debtors, with faster deadlines.
Chapter 11 is for a business that can survive once its debts are restructured, not one that is closing. It is complex, creditors get a say in the plan, and it carries court fees on top of attorney and other professional costs.
Negotiating or filing: how do they compare?
| Question | Negotiated wind-down | Chapter 7 | Chapter 11 |
|---|---|---|---|
| Who runs it | You, with your advisors | A court-appointed trustee | You, under court supervision |
| Business keeps operating | Until you close it | No | Yes, if the plan works |
| Pauses collection | No, each creditor decides | Yes, while the case is open | Yes, while the case is open |
| Guarantors protected | Only if released in writing | No | Not automatically |
| Public record | No | Yes | Yes |
Negotiation can be quieter and cheaper, but any creditor can refuse and sue. Bankruptcy brings every creditor into one process, at a real cost. A bankruptcy attorney can tell you which fits your business.
Where do we fit in a wind-down?
Clear Financial Company negotiates with funders and lenders to resolve what the business owes, and helps you plan the cash while you close. We do not file bankruptcy or give legal or tax advice. See business debt relief for the debts we negotiate most often.
If you are not sure yet whether to close, start with the numbers: a clear view of the cash can show whether the business could carry its debts on new terms. If you have been sued, talk to a business attorney first.
Things you should know
The downsides, stated plainly.
Read these before you talk to anyone about business debt, including us.
- Business debt negotiation is not a loan and does not lower what you owe until a funder or lender agrees in writing.
- Funders and lenders may keep collecting, report to business credit bureaus, or sue while talks go on. A personal guarantee can make you personally liable.
- Merchant cash advance contracts differ. Some funders will not negotiate, and results depend on your contracts and your cash flow.
- Forgiven business debt may be taxable. Talk to your accountant before you agree to any settlement.
- We do not give legal or tax advice. If you have been sued or served, talk to a business attorney right away.
- Fees apply. Ask for every fee in writing before you agree to anything, with us or anyone else.
Notes on the figures and claims above
- 1Business debt negotiation results depend on your contracts, your funders and lenders, and your cash flow. No outcome is guaranteed. Funders and lenders may keep collecting, report to business credit bureaus or sue, and a personal guarantee can make you personally liable. Forgiven business debt may be taxable.
Can I just close the business and walk away?
Not safely. The debts stay owed, guarantors can be pursued, and closing without notice can be a default under loan and MCA contracts. Plan the wind-down first.
Does dissolving my LLC or corporation end its debts?
No. Dissolving the company does not cancel what it owes, and personal guarantees survive. State law also sets rules for how a dissolving company deals with its creditors.
Can I sell business assets to pay the debts?
Often, but secured lenders have first claim on their collateral, and selling pledged assets without consent can be a default. Talk to the lender or an attorney first.
Sources
Where the facts on this page come from. Each link opens the original in a new tab.
- 01 U.S. Courts Chapter 7: Bankruptcy Basics (opens in a new tab)
- 02 U.S. Courts Chapter 11: Bankruptcy Basics (opens in a new tab)
- 03 IRS Employment taxes and the Trust Fund Recovery Penalty (TFRP) (opens in a new tab)
- 04 IRS Closing a business (opens in a new tab)
- 05 SBA Manage your business: manage your finances, and close or sell your business (opens in a new tab)
Next step
Closing the doors? Plan it with a real person.
Call 866-659-7966, or start with the four short steps. Nothing is signed until you say yes.
Four short steps
Your estimate first. Contact details last.
- 1How much you owea close guess is fine
- 2What kinds of debtpick all that apply
- 3Which state you live inchecked before anything else
- 4Your estimate, then a real person if you want one