How Long Until My Credit Recovers from Merchant Cash Advance Bankruptcy?
Filing for bankruptcy can be a difficult decision for any business owner. However, when faced with overwhelming merchant cash advance (MCA) debt and aggressive collection tactics, it may feel like the only option. The good news is that bankruptcy filings due to MCAs are on the rise and courts are starting to view these predatory loans less favorably.
What is a Merchant Cash Advance?
A merchant cash advance provides an upfront lump sum payment to a business in exchange for a percentage of future credit card and debit card sales. The terms often include exorbitantly high effective interest rates of 200-400%, with no set repayment period. Unlike traditional small business loans, MCAs technically are not defined as loans under legal definitions. This allows MCA companies to skirt state laws around usury caps on interest rates.
Why Do Small Businesses File for Bankruptcy Due to MCAs?
There are a few reasons why MCAs can push small businesses into bankruptcy:
- Debt spirals – To pay off initial MCAs, businesses take out additional advances at even higher rates. This creates a debt spiral that becomes unmanageable.
- Aggressive collections – MCA providers are notoriously aggressive in their collection tactics, including harassing phone calls and lawsuits. This financial stress can lead business owners to file bankruptcy.
- Unfavorable contract terms – Hidden fees, modifications to repayment terms, personal guarantee requirements, and other one-sided clauses are common with MCAs. These provisions exacerbate financial distress.
- Economic fluctuations – A downturn in business income makes it impossible to meet daily repayment percentages due to MCA companies. Bankruptcy becomes the only option.
How Does Bankruptcy Affect Your Credit Score?
Personal and business bankruptcy filings can significantly impact credit scores. Some key effects include:
- Chapter 7 and Chapter 11 bankruptcies can remain on your credit report for 10 years from the filing date. Chapter 13 bankruptcies can remain for 7 years.
- FICO credit scores can drop by as much as 240 to 300 points after filing. The higher your starting score, the larger the drop.
- Items like tax liens, judgments, and defaults related to the bankruptcy also appear on your report.
- Your score will start recovering after the bankruptcy drops off your report. Expect it to take 1-2 years to reach pre-bankruptcy levels.
Tips for Rebuilding Credit after MCA Bankruptcy
Recovering from an MCA-related bankruptcy will take time and discipline. But there are strategies that can help accelerate your credit repair efforts:
- Get a secured credit card – After 12 months or receiving bankruptcy discharge, apply for a secured card. Make payments on time to demonstrate responsible usage.
- Become an authorized user – Ask a family member with good credit to add you as a user to help rebuild positive payment history.
- Limit new credit applications – Each application triggers a hard inquiry on your report. Wait 12-18 months before applying for new financing.
- Review credit reports regularly – Ensure all bankruptcy-related info and accounts that were included in the filing are reporting accurately. Dispute errors.
- Consider credit counseling – Reputable non-profit credit counseling provides guidance on improving credit through budgeting and financial literacy programs.
How Long Does Bankruptcy Stay on Business Credit Reports?
For small business owners, merchant cash advance bankruptcies can also impact company credit reports from agencies like Experian Business and Dun & Bradstreet. Unfortunately, these commercial credit bureaus are not governed by the Fair Credit Reporting Act. There are no set reporting limits on how long bankruptcies stay on business reports.Some estimates indicate business bankruptcies may stay on reports for over 10 years. The major business credit agencies also do not allow companies to dispute inaccuracies the way consumer bureaus enable personal credit report disputes.As a result, recovering business credit standing presents additional hurdles compared to personal credit. Expect at least a 5-7 year timeline for reestablishing positive commercial credit.
What Are Alternative Options to Recover from MCA Debt?
For small businesses struggling with overwhelming merchant cash advances, bankruptcy may seem like the only choice. But make sure to explore all alternative debt relief options before deciding to file. Some alternatives to discuss with an attorney include:
- Debt consolidation – Combining multiple MCA obligations into a single loan allows you to pay down debt faster. Interest rates are still high but likely lower than short-term MCA rates.
- Debt settlement – Debt settlement companies negotiate with your MCA providers to reduce total payoff amounts. This helps eliminate debt without filing for bankruptcy.
- Debt restructuring – Working directly with MCA companies to restructure agreements can provide some relief. This may include reduced payments, longer terms, lower rates, or waived fees.
- Operational changes – Increasing profits through expanding services, reducing costs, or boosting marketing can help meet MCA payment responsibilities and prevent bankruptcy.
No matter what route you pursue to resolve MCA debt, be sure to consult qualified legal counsel to understand all available options. Act quickly, as the longer overwhelming payments persist, the harder it becomes to recover. Bankruptcy filings should be an absolute last resort option after exploring all other alternatives.
Can I File Bankruptcy Again After 5-7 Years?
For small business owners who do end up filing for bankruptcy once, it is possible to file again after 5-7 years per the bankruptcy code. However, courts look very closely at repeat filings. There is more scrutiny around the validity of the financial distress requiring a second bankruptcy.Demonstrating meaningful operational changes since the first bankruptcy can help justify the need for another filing. This may include evidence of pursuing credit counseling, reducing expenses, restructuring debt, or boosting income.Chapter 7 and Chapter 13 bankruptcies allow repeat filings after 8 and 6 years respectively. For Chapter 11, there is no specific limitation. But judges have broad discretion to dismiss repeat Chapter 11 cases if the financial issues seem avoidable.While possible, back-to-back small business bankruptcies are very rare. Most owners who file once do everything in their power to rebuild their companies to avoid having to file again.
Consult an Attorney About Merchant Cash Advance Bankruptcy
The decision to file bankruptcy is complex, especially when merchant cash advance debt drives the financial issues. Make sure to speak with a qualified legal professional to discuss your specific situation. An attorney can review your agreements, assess alternatives, and provide guidance on recovering if you do file.
