How Recent Court Decisions and the Threat of Chapter 11 Can Help Small Businesses Resolve MCA Debt
In our previous discussion on the challenges posed by Merchant Cash Advance (MCA) loans (MCA Loan Defaults are a Big Problem for Small Business), we highlighted the strain these agreements can place on small businesses, particularly when defaults occur. As the use of MCA loans continues to grow, recent court decisions are shedding new light on how these financial instruments are treated in Chapter 11 bankruptcy cases. This evolving legal landscape holds significant implications for lenders and borrowers alike.
MCA Loans: Recap and Unique Challenges
MCA agreements involve a business selling a portion of its future receivables to a lender in exchange for immediate funding. While these agreements are often marketed as loans of last resort, their high costs and lack of traditional repayment schedules can quickly lead to financial distress. Businesses facing MCA defaults frequently turn to Chapter 11 bankruptcy as a means of restructuring their obligations and regaining financial stability.
Yet, MCA lenders have historically exploited these agreements’ terms and structures to gain disproportionate leverage over struggling businesses. By employing aggressive collection tactics and drafting agreements with punitive provisions, MCA lenders have often exacerbated the financial woes of small businesses. However, recent court decisions across the United States have increasingly characterized MCA agreements as usurious loans rather than legitimate purchases of future receivables. This trend has significant implications for small businesses and MCA providers nationwide.
Key Court Rulings
Recent rulings are beginning to dismantle the predatory advantages MCA lenders have long relied upon, particularly in the context of Chapter 11 proceedings:
Exposing Disguised Loans and Weakening Lender ClaimsÂ
Courts are increasingly scrutinizing MCA agreements to determine whether they truly represent a sale of receivables or a disguised loan. This distinction is critical, as agreements deemed loans are subject to state usury laws and other borrower protections. In many cases, courts have found that MCA lenders failed to meet the criteria for a true sale, rendering their claims unsecured and reducing their leverage in bankruptcy cases.
Broadening Legal Precedents
New York: Multiple state court decisions, including those from the Appellate Division, have found MCA agreements to be usurious loans, bolstering legal challenges to these predatory instruments.
Montana: In a bankruptcy case, the court examined 18 MCA contracts and determined they were loans, awarding usury damages to the borrower.
Georgia: A bankruptcy court observed that when a buyer of accounts receivable holds substantial recourse against the seller, courts have routinely held the transaction to be a financing arrangement and not a sale.
New Jersey: The state filed suit against eight entities involved in MCA lending, challenging their practices as fraudulent and illegal predatory lending schemes.
Curbing Aggressive Collection TacticsÂ
MCA lenders frequently employ daily debits and other aggressive methods to extract funds from borrowers, even after a Chapter 11 filing. Courts are increasingly affirming that such actions violate the automatic stay, which protects debtors from collection efforts during bankruptcy proceedings. These rulings not only provide relief to small businesses but also deter lenders from using predatory tactics.
Factors Courts ConsiderÂ
When determining whether an MCA transaction is a loan, courts across jurisdictions typically examine:
The presence of a genuine reconciliation provision.
Whether the agreement has a finite term.
The recourse available if the merchant declares bankruptcy.
Using Chapter 11 or the Threat of Chapter 11 to Resolve MCA Debt
These developments mark a turning point for small businesses burdened by MCA obligations. Leveraging the protections of Chapter 11, businesses can take a proactive approach to dealing with aggressive MCA lenders. However, Chapter 11 is not the only option to resolve MCA debt. Negotiating with MCA lenders under the credible threat of Chapter 11 can often lead to structured settlements that avoid the need for formal proceedings or prolonged litigation. Here are some strategies:
Structured Settlements
Many lenders, when faced with the possibility of a Chapter 11 filing, may be willing to negotiate more reasonable repayment terms to avoid the expense and uncertainty of bankruptcy proceedings. This can include reducing daily payment obligations, extending the repayment period, or even forgiving portions of the debt.
Use Chapter 11 as Leverage
The prospect of a company filing for Chapter 11 can motivate MCA lenders to come to the table. Chapter 11’s automatic stay halts collection efforts, and lenders may prefer a negotiated settlement over the possibility of their claims being reclassified as unsecured or reduced under a reorganization plan.
Professional Guidance
Engaging experienced legal counsel to negotiate with MCA lenders can help small businesses navigate these discussions effectively, ensuring that the terms of any settlement align with their long-term financial health.
By taking advantage of the protections and leverage provided by Chapter 11 without necessarily initiating a filing, small businesses can regain control of their finances and mitigate the impact of predatory MCA agreements.
Conclusion
The legal landscape for MCAs is evolving rapidly across the United States. Recent court decisions are paving the way for greater accountability and fairness, offering small businesses a lifeline in the face of financial distress. EmergeLaw stands with small businesses in their fight for justice and financial stability. If your business is grappling with MCA obligations, contact us to explore your options and chart a path forward.
Robert Gonzales helps business owners navigate loan workouts, Chapter 11 reorganizations, and strategies for addressing predatory MCA arrangements. With a focus on practical solutions and compassionate guidance, he empowers businesses to resolve financial challenges, regain stability, and retake control of their future.
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