Debt Workout Michigan: How Business Owners Can Avoid Bankruptcy and Regain Control
If your business is struggling, you may be considering the different options you have to dig yourself out of a hole. Depending on your specific situation, you may be wondering whether business bankruptcy is the right avenue for you.
But, how can you tell?
Sometimes, you may just be experiencing a cash flow crisis that can be fixed by strategic business decisions.
In this article, we’ll discuss how business owners can regain control of their finances and avoid bankruptcy through debt workouts.
The Difference Between a Cash Flow Crisis and True Insolvency
Both a cash flow crisis, also called illiquidity, and balance-sheet insolvency both have to do with financial troubles, but there are clear distinctions between the two.
As per state law in Michigan, illiquidity happens if a company doesn’t possess enough assets to meet what its current debt obligations are. Insolvency, by contrast, is the term used when the company doesn’t have sufficient assets that would satisfy all its liabilities.
In most standard loan agreements, commercial lenders in Michigan will specifically define these terms.
General default is generally described as the borrower missing a payment or not complying with terms of the loan. This triggers the creditor’s right to take legal action.
Actual insolvency, meanwhile, is defined as having debts that outweigh assets at fair valuation.
Many Michigan businesses that are experiencing financial distress may turn to liquidation too quickly, when they are actually good candidates for restructuring.
What Happens if You Do Nothing — The Michigan Creditor Playbook
Taking no action on outstanding debt is not a good idea, as creditors in Michigan will not sit by the wayside.
There is a typical process that most creditors in the state follow that starts with a demand letter and is followed by remedies in the Uniform Commercial Code (UCC) Article 9, getting a judgment from a circuit court and finally garnishment of income and wages.
While delinquencies can happen in any industry, the industries with the highest default rates in Michigan currently include auto supply chain, hospitality and commercial real estate.
So, What Actually is a Debt Workout in Michigan?
Businesses do have options, though, and one is called a debt workout. In plain terms, a debt workout is an agreement between a debtor (business owner in this case) and creditor they owe money to.
It’s designed to help avoid default and to make both parties as “whole” as possible.
The core components of a workout agreement include the creditor agreeing not to pursue legal action temporarily and an amended repayment schedule being agreed upon by both parties.
A debt workout, of course, is a negotiation, where both the borrower and creditor try to get the most advantageous deal possible for themselves.
The business owner may have more leverage at the negotiating table if they have high collateral value, if they didn’t put a personal guarantee on the loan and if they have multiple lenders.
On the other hand, if the threat of repossession is real, and the asset is crucial to the borrower, then the creditor may have more leverage.
While a debt workout can be very beneficial, business owners need to keep in mind that forgiven debt may become taxable income.
Under the Internal Revenue Code, the IRS will generally treat forgiven or canceled debt — also called Cancellation of Debt Income (CODI) — as taxable income. In addition, if this debt amount is to be included in your adjusted gross income for the federal level, it’s also generally subject to state income tax.
You can potentially avoid CODI, though, if you file some bankruptcy, are termed to be insolvent or go through loan modification instead.
When Does Bankruptcy Actually Make More Sense?
There may come a time when Chapter 7 bankruptcy makes sense for business owners.
The process in both the Eastern District and Western District of Michigan are similar when it comes to business liquidation.
For sole proprietorships, the business assets are considered part of the personal bankruptcy estate. Certain assets may be exempt from the process.
For LLCs and corporations, the business is treated as a separate “person.” If you have personally guaranteed any business debts, the guarantees can be discharged in personal bankruptcy. They aren’t automatically discharged, though, through the business bankruptcy filing.
In all cases, the bankruptcy trustee will sell any assets that are not exempt, and then distribute them to creditors according to a priority order.
Chapter 11 — Powerful, But Is It Right for Your Size?
Chapter 11 bankruptcy, also known as a “reorganization,” could also be an option. In this case, the business has possession of the duties and powers of a trustee and can continue to operate the business.
Doing so, though, can be quite expensive. Attorney fees, financial advisor costs and U.S. Trustee quarterly fees, to name a few, can add up quickly — potentially to more than $100,000, depending on the situation.
Subchapter V — The Option Most Michigan Business Owners Have Never Heard Of
Under the Small Business Reorganization Act (2019), another option was created for businesses. Known as Subchapter V, it’s a streamlined option for businesses that want to restructure their debts, providing them with a more cost-effective means to do so.
To qualify for this option, businesses must not have more than $3.424 million in total debt. There was a temporary higher limit of $7.5 million put into place by the CARES Act, by that threshold expired on April 1, 2025.
There is proposed legislation in Congress, though, that would reinstate that higher cap.
There are many advantages that Subchapter V provides businesses over traditional Chapter 11 bankruptcy.
This includes no creditors’ committee, which results in less complexity and lower costs; owner equity retention, which allows the owner to keep their business; and a faster confirmation timeline, with a strict 90-day deadline versus a more flexible 120-day period or more.
Debt Workout Michigan vs. Bankruptcy — The Side-by-Side Reality Check
In many cases, a debt workout is a considerably better option than bankruptcy for Michigan business owners. The time and money that can be saved through a debt workout alone is reason enough to go this route if possible.
In addition, bankruptcy cases are public. Even if the outcome is beneficial to the business, it is likely to suffer from long-term effects such as fractured business and banking relationships, and possibly even a hit to the business’ reputation.
How Michigan Business Owners Should Think Through This Decision
So, which option is best for you?
A debt workout is typically the right call if you’re experiencing a temporary issue with cash flow, if you have $50,000 or more in debt that’s unsecured and if you want to avoid the complicated and potentially costly bankruptcy process.
On the flip side, bankruptcy might be the best avenue if you have debts that significantly exceed your business revenue and assets, if there’s no restructuring of the debt possible and if you need legal protection immediately.
Consult with the Experts at Babi Legal Group
Debt workouts could be a great option for Michigan business owners who want to regain control of their business finances and avoid bankruptcy. It’s an option that many business owners don’t know about but need to explore more.
At times, it can be difficult to decide whether a debt workout or bankruptcy is right for you. This is when you should consult with an experienced attorney such as those at Babi Legal Group.
We have more than 10 years experience in business, debt collection, debt settlement and bankruptcy law. Our team can help guide you through the process and decide which option is best for your Michigan business.
To learn more, please contact us today.
