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What Type of Bankruptcy Gets Rid of Merchant Cash Advance Debt?

If you’re a business owner who has taken out a merchant cash advance (MCA) and is now struggling with debt, you may be wondering if filing for bankruptcy can help relieve some of that burden. Unfortunately, the answer is complicated. MCA loans occupy a gray area when it comes to bankruptcy, but working with an experienced attorney can help you navigate your options.

How Do MCA Loans Work?

Before diving into bankruptcy, it helps to understand what MCA loans are and how they work.MCA loans provide quick access to capital by allowing a business to receive an upfront lump sum in exchange for a percentage of future credit card and/or debit card sales over a set period of time. The borrower repays the advance as customers make everyday purchases.Unlike traditional bank loans, MCA loans:

  • Are not based on personal credit scores or business assets/revenue
  • Have higher interest rates and fees
  • Allow daily or weekly repayments as a percentage of credit card sales
  • Do not have fixed monthly payments or set repayment terms

This flexibility and easy qualification make MCAs appealing. However, their unregulated nature can also lead borrowers into tricky situations, especially if sales drop unexpectedly.

The Problem With MCA Loans in Bankruptcy

Filing bankruptcy provides relief by discharging or reorganizing debts you can’t reasonably pay back. However, MCA loans do not fit neatly into the bankruptcy code.The main obstacles are:

  • MCA loans are not considered “credit” under bankruptcy laws. This prevents them from being discharged like credit card or medical debts.
  • MCAs use credit card sales as collateral, allowing lenders to take a cut of future sales. This entwines them with business operations and makes segregating the debt difficult.
  • Lack of case law precedent means most judges have limited experience dealing with MCA loans in bankruptcy. Rulings can vary widely between courts.
See also  Arizona MCA Defense Lawyers Business Debt Relief

With an experienced attorney’s help, some options do exist. But most will require challenging the MCA lender’s rights in an adversarial bankruptcy proceeding.

Chapter 7 Liquidation Bankruptcy

Chapter 7 bankruptcy allows qualified individuals and businesses to liquidate assets and discharge eligible debts. Any assets not exempt under state law can be sold by the bankruptcy trustee to pay creditors. Remaining discharged debts are wiped out.However, MCA loans cannot be discharged under Chapter 7 bankruptcy because they do not meet the legal definition of “credit.” Borrowers would still need to continue allowing the MCA lender to take a percentage of future sales.The only exception is if the court determines the MCA loan meets the standards of “credit” after an adversarial proceeding. This is rare but not impossible.

Chapter 11 and Chapter 13 Bankruptcy Reorganization

Chapter 11 and Chapter 13 bankruptcies allow qualified individuals and business owners to restructure debts and repay them under a court-approved plan over 3 to 5 years. This allows borrowers to catch up on payments rather than liquidate assets.MCA loans receive the same treatment as taxes and other debts tied to business operations in Chapter 11 and Chapter 13 bankruptcies. Borrowers must continue paying the MCA lender over the repayment plan term.However, skilled bankruptcy attorneys can assist with strategies such as:

  • Filing an adversarial proceeding to dispute the MCA loan terms and attempt to discharge the debt.
  • Structuring the repayment plan to account for future MCA payments so they do not jeopardize the reorganization.
  • Seeking injunctive relief to pause MCA payments during bankruptcy, if they would prevent a successful reorganization.
See also  Albuquerque MCA Defense Lawyers Business Debt Relief

The feasibility of these options depends heavily on each court’s interpretation. But an attorney experienced in disputing MCA loans can offer the best shot.

What About Settlement?

Rather than entering bankruptcy, some borrowers attempt negotiating a settlement on the MCA loan directly with lenders. This avoids court intervention in discharging or restructuring the debt.Settlements often involve paying off a portion of the remaining loan balance (commonly 20-50%) as a lump-sum payment to release the obligation. This route holds less certain outcomes but also avoids draining legal expenses.Reputable debt relief services like Delancey Street have attorneys well-versed in MCA settlements who can interface with lenders to secure deals. They also provide expert guidance on which debt relief approach aligns best with your situation.

Key Takeaways on MCA Loans and Bankruptcy

The complexity around addressing MCA loans through bankruptcy makes having experienced legal guidance invaluable. Key points to remember:

  • MCA loans do not qualify as credit, preventing discharge under Chapter 7
  • Chapter 11 and 13 allow restructuring but require continuing payments
  • Adversarial proceedings can attempt discharging MCA debt but have mixed outcomes
  • Settlement negotiations directly with the lender also offer an alternative

While certainly not easy, viable options exist to find financial freedom from MCA loans. An attorney well-versed in this specialized area can help uncover the best path based on your specific circumstances. Do not hesitate to connect with legal experts to discuss your alternatives.

About Delancey Street

  • We have extensive experience with business debt relief, including navigating complex MCA loans.
  • Our dedicated experts focus on each client’s needs to create customized debt relief solutions.
  • We will help you understand all your options—whether bankruptcy, settlement, or other approaches.
  • As former debt collectors, we know how to negotiate settlements with MCA lenders.
  • Contact us at 212-210-1851 for a free consultation and case assessment from our legal team.
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