How to Prove Undue Hardship for Merchant Cash Advance Bankruptcy

How to Prove Undue Hardship for Merchant Cash Advance Bankruptcy

Merchant cash advances (MCAs) have become a popular form of business financing, but they can lead to overwhelming debt for some business owners. If you find yourself in a situation where MCA debt is pushing your business towards bankruptcy, you may have the option to discharge all or part of this debt by proving “undue hardship.” However, the legal standards for proving undue hardship differ depending on the type of bankruptcy you file: Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy, all eligible debts are typically discharged. However, to prevent the discharge of an MCA debt, the MCA company must file an adversary proceeding against you within 60 days after the creditors’ meeting. They must prove two main points:

  1. Your ability to repay: The MCA company must demonstrate that you have the ability to repay all or part of the debt without undue hardship.
  2. Benefit to other creditors: They must also show that not discharging the debt would benefit your other creditors.

The court assesses undue hardship by examining your current income, expenses, and whether you could realistically repay the debt after bankruptcy without severe deprivation. Factors considered include your employment status, monthly disposable income, efforts to repay the debt, and any unforeseen circumstances contributing to your financial struggles.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to reschedule installment payments on debts over 3-5 years instead of discharging them. MCA debts are treated as unsecured claims in Chapter 13 bankruptcies. You can treat an MCA debt as dischargeable by default or challenge its validity by filing an adversary proceeding.

To fully discharge an MCA debt in Chapter 13, you must prove undue hardship through a separate adversary proceeding. This requires demonstrating:

  1. Inability to maintain a minimal standard of living: You cannot sustain a basic standard of living for yourself and dependents if forced to repay the debt.
  2. Likelihood of ongoing hardship: Circumstances show that this situation is likely to persist throughout the repayment period.
  3. Good faith efforts: You have made genuine efforts to repay the debt despite your hardships.

This test is even more stringent than Chapter 7, requiring you to show that even paying a small amount towards the debt would prevent you from meeting basic needs.

Building an Undue Hardship Case

Building a strong undue hardship case requires detailed documentation of your income, expenses, assets, liabilities, and overall financial situation. Steps to take include:

  1. Gather statements: Collect income and expense statements, tax returns, bank statements, bills, receipts, and other financial documents for at least 6 months.
  2. List assets and debts: Detail all assets exempt from creditors, non-exempt assets, and all secured and unsecured debts.
  3. Calculate disposable income: Determine your monthly disposable income after accounting for essential expenses.
  4. Describe difficulties: Explain any circumstances such as medical problems, divorce, business decline, or other events impacting your finances.
  5. Explain efforts: Describe efforts made to increase income, cut expenses, negotiate with creditors, or restructure the business.

The more detailed and comprehensive your documentation, the stronger your case will be. Working with a bankruptcy attorney experienced in dealing with MCAs can greatly assist in navigating the legal complexities and presenting a compelling argument for undue hardship.

Assessing Eligibility for Undue Hardship Discharge

Determining if your situation meets the criteria for undue hardship discharge involves analyzing various factors, including:

  • Employment status: Your current and expected future earnings.
  • Disposable income: How much you can realistically pay towards debts without hardship.
  • Debt burden: Your debt-to-income ratio and outstanding debts.
  • Financial shocks: Unexpected events impacting your financial situation.
  • Good faith efforts: Efforts made to repay the debt despite difficulties.

These factors are critical in demonstrating the severity of your financial situation and the inability to repay the MCA debt without enduring hardship.

Gathering Supporting Documentation

Supporting your claims of financial hardship requires thorough documentation, including:

  • Income verification: Pay stubs, tax returns, bank statements, etc.
  • Expenses: Detailed records of both business and personal expenses.
  • Debt obligations: Statements and payment histories for all outstanding debts.
  • Asset values: Documentation on all business assets and liabilities.
  • Extenuating circumstances: Medical records, legal notices, evidence of disasters, etc.

Detailed records across these areas provide tangible evidence supporting your undue hardship claim.

Understanding MCA Contract Terms

Understanding the terms of your MCA contract is essential, as certain characteristics unique to MCAs can be leveraged to challenge their validity or enforceability. Key aspects to understand include:

  • No underwriting: MCAs often lack thorough underwriting processes.
  • Short-term focus: High repayment rates prioritize quick capital recovery.
  • No collateral: MCAs rely on merchant processing rather than business assets.
  • Variable repayment: Repayment amounts fluctuate based on processing volume.
  • Lack of transparency: Effective interest rates may not be clearly disclosed.

Leveraging these characteristics can strengthen arguments for undue hardship.

Understanding Bankruptcy Court Approach

Navigating bankruptcy court requires understanding judges’ expectations and adhering to evidentiary standards. Key considerations include:

  • Seeking truth: Judges assess the genuineness of financial hardships and efforts to repay debts.
  • Expecting detail: Detailed documentation supporting claims of hardship is essential.
  • Assessing viability: Judges evaluate the business’s potential for sustainable operations.
  • Considering choices: Alternative paths to improve the situation are considered.
  • Determining good faith: Efforts to repay debts prior to bankruptcy are scrutinized.

Adhering to these considerations and presenting a well-supported case increases the likelihood of a successful undue hardship discharge.

Strategies for Pro Se Litigants

For those representing themselves in bankruptcy court, thorough preparation and understanding of procedural rules are essential. Tips for pro se litigants include:

  • Study rules: Familiarize yourself with bankruptcy rules and procedures.
  • Organize records: Keep detailed records and documents organized.
  • Research judges: Understand judges’ history and approach to cases.
  • Bone up on law: Study relevant statutes and case law.
  • Watch proceedings: Attend court hearings to learn from other cases.
  • Ask for guidance: Seek advice from trustees and court clerks.

While challenging, pro se litigants can navigate the bankruptcy process with diligence and preparation.

Working With a Bankruptcy Attorney

Engaging a bankruptcy attorney experienced in handling MCA cases offers several benefits, including:

  • Case strategy: Crafting effective arguments to challenge MCA contracts and prove undue hardship.
  • Document review: Ensuring all required documentation is comprehensive and compelling.
  • Procedural guidance: Navigating the complex bankruptcy process efficiently.
  • Court representation: Representing you during court proceedings and adversary proceedings.
  • Settlement negotiations: Negotiating favorable debt repayment plans when applicable.
  • Ongoing support: Providing support and guidance throughout the bankruptcy process.

While legal representation comes with costs, it significantly improves the chances of a successful outcome in bankruptcy proceedings.

In conclusion, proving undue hardship for merchant cash advance bankruptcy involves meticulous documentation, understanding of legal standards, and strategic presentation of arguments. Whether pursuing Chapter 7 or Chapter 13 bankruptcy, working with a knowledgeable attorney increases the likelihood of a favorable outcome.

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