When Can You Legally Stop Paying Back a Merchant Cash Advance?

When Is Bankruptcy an Option for Merchant Cash Advance Debt?


Getting a merchant cash advance can seem like an easy way for a small business to get quick funding. Unlike a bank loan, merchant cash advances don’t require a strong credit score or business history. The catch is that the repayment terms are usually very unfavorable for the business. Rates can be exorbitantly high, sometimes exceeding 100% APR when fees are factored in.

Understanding Merchant Cash Advances

What Is a Merchant Cash Advance?

Before we dive into the tricky relationship between merchant cash advances (MCAs) and bankruptcy, let’s level-set on what exactly an MCA is.

A merchant cash advance provides quick funding to businesses in exchange for a percentage of future sales. An MCA company gives you an upfront lump sum, then takes a fixed amount from your credit card receipts each day until the balance has been repaid.

The daily payments are taken automatically as a percentage of sales, which is why MCAs don’t require fixed monthly payments like a small business loan. This flexible repayment structure helps businesses manage cash flow. Slow sales days mean lower payments, while busy days see more money go to repaying the advance.

While merchant cash advances seem less risky and rigid than traditional financing, they come at a steep price. Fees equivalent to 60-200% APR are common. And if a business closes before fully repaying, the MCA company can legally pursue the business owner for the remaining balance.

The Challenge of Discharging MCA Debt in Bankruptcy

Why MCA Debt Is Hard to Discharge in Bankruptcy

With interest rates rivaling those of payday loans and aggressive collection practices, it’s no wonder struggling business owners consider bankruptcy to relieve merchant cash advance burdens.

But filing for bankruptcy does not guarantee your MCA debts will be forgiven. The biggest obstacle is that MCA companies claim not to be lenders. Instead, they say the lump sum payments are an advance purchase of future sales.

Under this interpretation, repaying the MCA means they are simply collecting what they already own – your future receipts. These quasi-purchase agreements place MCAs in a legal gray zone that leaves room for debate on whether the debt can be discharged like other loans.

Complicating matters further is the fact that bankruptcy courts have issued conflicting rulings on the dischargeability of MCA debts. Some judges consider MCAs to be disguised loans, while others view them as actual sales agreements. There is no universal consensus.

The legal uncertainty means filing for bankruptcy is risky if you have outstanding merchant cash advances. You may successfully wipe some or all balances, but you also may remain on the hook for repayment if the court treats them like sales agreements.

Strategies for Discharging MCA Debt through Bankruptcy

Navigating the unpredictable legal territory around merchant cash advances in bankruptcy requires skilled legal guidance. Working with a bankruptcy attorney is essential to understand your odds of success and craft an optimal filing strategy.

That said, there are a few key things you can do to tilt the odds in your favor if you want to discharge MCA debt through bankruptcy:

  • Analyze if the MCA agreement resembles a loan – Factors like set repayment periods, specified interest rates and fees, and personal guarantees from business owners can help establish that an MCA functions more like a loan than a purchase agreement in practice. Highlighting these loan-like clauses strengthens arguments for discharging the debt.
  • File under the appropriate chapter – Chapter 7 bankruptcy fully liquidates assets to pay creditors, while Chapter 13 restructures debts under a court-supervised repayment plan. The majority of attempts to discharge MCA debt happen under Chapter 7, but experienced attorneys may advise filing Chapter 13 depending on your situation.
  • Dispute flaws in the MCA agreement – Even slight technical errors like incorrect business names or signatures could invalidate parts of the MCA contract. Identifying discrepancies bolsters claims that you should not be held to the full repayment terms.

Getting relief from overwhelming MCA debt through bankruptcy is never guaranteed given the legal uncertainties. But following the right strategies gives you the best possible chance of discharging all or some of your balances.

What to Expect When Filing for Bankruptcy

If you move ahead with filing for bankruptcy to deal with merchant cash advance debts, it’s important to understand the process and potential outcomes. This knowledge allows you to prepare your business and personal finances accordingly.

The two most common bankruptcy options are Chapter 7 liquidation and Chapter 13 reorganization. Here’s an overview of how merchant cash advance debts would be handled under each one:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy eliminates eligible debts by liquidating non-exempt assets. A court-appointed trustee sells your property and uses the proceeds to repay creditors. MCA companies must cease collection efforts for any remaining balances after liquidated assets are distributed.

Outcomes with MCA debt:

  • Best chance of fully discharging balances
  • Business assets may be seized and sold
  • Remaining MCA debts could be ruled as non-dischargeable
  • Business would need to close

Chapter 13 Bankruptcy

Chapter 13 allows you to keep assets by committing to a 3-5 year repayment plan structured by the court. You must demonstrate sufficient income to make plan payments. Unsecured debts like MCAs may be partially or fully discharged upon completion.

Outcomes with MCA debt:

  • MCA debts may be considered priority claims excluded from discharge
  • Repayment plan payments would be distributed to creditors
  • MCA collection activity stops during and after bankruptcy
  • Business may remain open if finances allow plan payments

As you can see, filing bankruptcy offers some protection by halting collections and providing opportunity for relief. But nothing guarantees merchant cash advance balances will be eliminated. Thorough legal preparation is necessary to help sway judgments in your favor.

Exploring Alternatives to Bankruptcy for MCA Relief

Pursuing bankruptcy can be an intimidating, expensive, and uncertain proposition. Before taking that step, make sure you explore all alternative debt relief options. There are a few strategies to mitigate merchant cash advance burdens outside of formal bankruptcy.

  • Debt consolidation loans
  • Hardship programs
  • Debt settlement
  • Debt management plans
  • Ask friends/family for help

The reality is bankruptcy should not be your first option when facing unmanageable merchant cash advance debt. Start by fully analyzing your financial situation and pursuing every other avenue for relief before considering filing.


Trying to weigh bankruptcy against other debt relief alternatives can feel overwhelming when you’re struggling to keep your business afloat. But our team of legal and financial experts can help you see the full picture.

We provide free consultations to review your unique situation, clearly explain all options, and offer informed recommendations. Our number one goal is crafting an optimal path to stabilize your finances, whether that involves bankruptcy or not. We know the right solution looks different for every business.

So if unrelenting merchant cash advance debt has you feeling hopeless and stuck, reach out for personalized guidance. Our lawyers have successfully assisted numerous business owners in similar circumstances. We can help you too.

Call 212-210-1851 or contact us online to schedule your free consultation today. Together, we can discover the smartest strategies for managing merchant cash advance balances. Help is available – you just need to take the first step by connecting with our compassionate team.

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