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How to Prove Undue Hardship for Merchant Cash Advance Bankruptcy

Merchant cash advances (MCAs) have become an increasingly popular form of business financing in recent years. Unlike traditional bank loans, MCAs provide quick access to capital without requiring strong credit or collateral from the business owner. However, some business owners have found themselves overwhelmed by high repayment rates and fees associated with MCAs. In severe cases, the business is unable to repay the MCA as agreed upon, leading the business owner to consider bankruptcy.Proving undue hardship is a difficult but necessary step when filing for bankruptcy to discharge MCA debts. Steven Raiser, Chief Legal Officer at Delancey Street, explains the options available and key strategies to demonstrate undue hardship. With over 15 years of experience advising small business owners on complex legal matters, Steven and his team at Delancey Street can provide knowledgeable legal guidance if you are struggling with MCA debts.

What is an MCA and Why Would a Business Seek Bankruptcy?

• MCAs Provide Fast Access to Capital But Have High Rates – MCAs appeal to business owners who need funds quickly since money can be accessed in days without strict eligibility requirements. However, the equivalent annualized interest rate often exceeds 50%.
• Daily Repayments Strain Cash Flow – MCAs extract a fixed percentage of daily credit card sales from the business owner’s merchant account. This can equate to repaying double the original advance within less than a year.
• Fees and Penalties Further Drive Up Costs – MCA contracts often have expensive associated fees, including origination fees, underwriting fees, and penalties for late payments. Businesses may fall behind as more and more cash flow is diverted to the MCA.

Facing crushing repayment burdens from an MCA, bankruptcy may appear to be the only option for an overwhelmed small business owner. However, MCA debts cannot be cleared through bankruptcy without first demonstrating undue hardship.

The Legal Test for Proving Undue Hardship

The legal standard to prove undue hardship for discharging MCA debts requires meeting three tests, known collectively as the Brunner test:

• Past Inability to Repay – Show a good faith effort was made to repay the MCA but it caused an inability to pay basic living expenses. Provide evidence like bank statements, accounting records, and tax returns.
• Ongoing Financial Hardship – Prove exceptional circumstances exist making future repayment unlikely. For example, show business revenues declined sharply after taking the MCA or unexpected one-time expenses prevented repayment.
• No Realistic Repayment Options – Demonstrate you explored repayment options like loan modifications or partial settlements but none are feasible without ongoing undue hardship.

Key Strategies for Building an Undue Hardship Case

• Highlight Unfair MCA Terms – Terms like extremely high equivalent interest rates, expensive add-on fees, short repayment periods, and overreliance on credit card receivables can show the MCA contract was predatory in nature.
• Document Cash Flow Shortfalls – Records showing revenues declined after taking the MCA or major one-time expenses prevented repayment helps satisfy the legal test.
• Obtain Expert Witness Testimony – A small business finance expert reviewing the MCA terms and your financial records can sway the judge’s opinion by corroborating unfair terms and validating cash flow hardship.

What to Expect When Filing for MCA Bankruptcy

• The judge will thoroughly review business and personal financial records before deciding if undue hardship exists. Be prepared to disclose tax returns, bank statements, accounting records, and current budgets.
• Interested parties like the MCA lender can dispute the undue hardship claim requiring additional documentation. A persistent legal fight may ensue.
• If successful, any remaining MCA balance will be discharged but the impact on personal credit scores depends on the type of business entity. Sole proprietors and single member LLCs may incur damage to their personal credit record.

As this overview illustrates, proving undue hardship requires in-depth financial analysis and extensive legal preparation. The legal team at Delancey Street has experience building compelling undue hardship cases for small business owners seeking escape from crushing MCA debts. If you are struggling to repay a merchant cash advance, contact Delancey Street at 212-210-1851 to explore your options. There are bankruptcy defenses available even when initially facing aggressive, well-financed MCA lenders.

Dangers of Merchant Cash Advance Loans

Merchant cash advances provide easy access to capital but come with a hidden dark side not always evident at first glance. Steven Raiser has represented clients facing financial ruin due to predatory MCA lending practices. He advises small business owners to enter MCA agreements cautiously after considering their dangers.

• Deceptively High Costs – MCA equivalent interest rates often exceed 50% APR when factoring in fees and short repayment periods.
• Overreliance on Future Sales – MCA payments tied directly to credit card receipts put future business revenues at risk. Sales declines quickly make MCAs unaffordable.
• Inflexible Repayment Terms – The contracted fixed percentage deductions from credit card sales leaves little room to manage cash flow shortfalls.
• Aggressive Collections – MCA lenders can freeze merchant accounts or sue for full recourse against business assets and owners’ personal assets.

Rusher into an MCA without reading the fine print or modeling cash flow impact across various sales scenarios frequently leads to financial quicksand for small businesses.

Specific Defenses Against Merchant Cash Advance Lenders

Beyond proving undue hardship, Steven Raiser identifies defenses small business owners can assert against predatory MCA lending practices:

• Unconscionable Contract Terms – MCA contracts overly favorable to lenders may be invalidated as unconscionable like excessively high rates or unreasonable repayment periods.
• Deceptive Marketing Practices – Evidence of bait-and-switch lending tactics or obscured terms and conditions can nullify MCA agreements.
• Violations of State Laws – State usury laws restricting maximum interest rates or payday lending statutes limiting repayment periods can override MCA contracts.
• Racketeering Allegations – Some courts have allowed charges of racketeering and extortion against egregious MCA collections practices.

While MCA loans appear innocuous at first, small business owners may have grounds to contest enforcement if faced with crushing repayment terms or abusive collection tactics.

Overcoming Merchant Cash Advance Hardship

The potential downside of merchant cash advances is real with bankruptcy often the only escape for small business owners trapped in a predatory lending cycle. Proving undue hardship opens a path to discharge MCA debts but requires extensive legal preparation and financial analysis. Contact the legal team at Delancey Street at 212-210-1851 if you are overwhelmed by MCA repayment burdens. Our lawyers have successfully fought some of the largest MCA lenders by exposing overly aggressive lending practices. There are options to find relief even in the most desperate financial circumstances caused by merchant cash advances.