When Is Bankruptcy an Option for Merchant Cash Advance Debt?

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

Getting a merchant cash advance can seem like an easy way to quickly access funds for your business. However, failing to fully understand the terms of these financing agreements can land entrepreneurs in hot water when they are unable to make payments. So when can you legally stop paying back a merchant cash advance?

Understanding Merchant Cash Advances

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a form of business financing where a company receives an upfront lump sum of cash in exchange for a percentage of future credit card and/or debit card sales. An MCA provider essentially purchases a business’s future receivables at a discount.

Unlike a traditional small business loan, merchant cash advances do not come with fixed monthly payments. Instead, the business agrees to send the MCA provider a set percentage of daily credit card sales – typically between 10-20% – until the full amount plus fees and interest is repaid. This is done automatically through daily or weekly debits from the business’s merchant account.

The ease and speed of obtaining an MCA makes it attractive to businesses who may not qualify for other financing options. However, the high costs and loosely regulated nature of the industry has also led many entrepreneurs into difficult situations when business slows down or unexpected expenses arise.

When Can You Stop Making MCA Payments?

The short answer is – legally, almost never. Here’s why:

  • MCA agreements are structured as purchases of future receivables, not loans. This means payments are contingent upon card processing volume, not fixed monthly amounts like a term loan.
  • So even if business comes to a standstill, technically there is no way to default. The contract states you must continue sending a percentage of daily credit card sales until the full purchased amount plus fees/interest is paid – even if that takes months or years longer than expected.

Some key points:

  • MCA providers have the right to debit business accounts until the balance is paid. Trying to close these accounts will not release you from payments.
  • Legal precedents uphold MCAs as true sales, not loans. So consumer protection laws governing loans/debt do not apply.
  • Personal guarantees mean business owners are personally responsible for full repayment, even if the business fails or closes.
  • MCA contracts authorize providers to resell unpaid balances to third party collection agencies that can aggressively pursue payment.

The only potential way to legally stop payments is if you can conclusively prove fraud on the part of the MCA provider. And even this is extremely difficult to establish.

So Can You Ever Stop Paying?

While rare, there are some circumstances where business owners have managed to halt MCA payments:

Proof of Fraud

If you can demonstrate clear evidence the MCA provider defrauded you from the outset or made intentionally false statements to induce you to sign, you may have grounds to sue for predatory lending practices.

This is very hard to establish, however. MCA contracts are written to protect providers from such claims. And most courts still uphold MCAs as sales even when fraud is alleged.

Bankruptcy Filing

Filing for bankruptcy does not make MCA debt disappear. But it can sometimes force a settlement for less than the full amount owed. This seriously damages your credit and ability to access financing in the future, however.

Out of Business

If your business genuinely goes out of business, payments could theoretically stop once all accounts are closed and no more credit card receipts are coming in. But MCA providers can still sue you personally for the debt, and many sell unpaid balances to aggressive third party collectors.

Sale of Business

If you sell your business entirely, MCA debt does not automatically transfer to the new owner. In theory this could release you from payment obligations. But there are still risks of getting sued personally or having debts sent to collections.

As you can see, legally stopping MCA payments is extremely difficult even when your business is failing. Unless fraud can be irrefutably proven, you will be on the hook for full repayment plus fees/interest regardless of your current financial situation. This is why it is absolutely critical to fully understand MCA terms before signing anything.

What To Do if You Cannot Afford Payments

Defaulting on an MCA agreement will trash your credit, expose you to aggressive collections harassment, and likely result in judgements and liens against your personal assets. So it’s critical to avoid it if at all possible.

If making payments has become difficult, here are some proactive steps to take:

  • Seek Payment Relief
  • Explore Refinancing
  • Attempt Debt Settlement

The Bottom Line:

Legally stopping payment on a merchant cash advance is nearly impossible except in cases of clear fraud – which is extremely hard to prove. MCAs are structured as purchases, not loans. So consumer protections for borrowers in distress do not apply.

If repaying has become difficult, proactively communicating with your provider, refinancing, or settling your debt for less than owed may be your only realistic options. Just understand that MCA agreements authorize collections, lawsuits, and enforcement actions that can badly harm you if payments ever cease entirely. Thoroughly explore alternatives before going that route.

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