Key Takeaways

• A merchant cash advance is written as a purchase of your future receivables, not a loan. That wording is how funders avoid interest-rate limits, and it is often open to challenge.
• Filing a Chapter 11 case triggers the automatic stay. Withdrawals from your account, lawsuits, judgments and demands sent to your customers must stop.
• In Subchapter V, the business keeps operating, the owner stays in control and the debt is repaid over three to five years from what the business can actually afford.
• The owner’s personal guarantee is a separate problem and has to be planned for at the same time.

How Merchant Cash Advances Go Wrong

The funder pays a lump sum and takes back a larger fixed amount through daily or weekly withdrawals from the business bank account. The cost, expressed as an annual rate, is often far higher than any bank loan. Most agreements also include:

• A personal guarantee signed by the owner.
• A lien on the business’s receivables and other assets, recorded as a UCC financing statement.
• The right to send notices to your customers or your card processor directing them to pay the funder instead of you.
• A confession of judgment or similar clause that speeds up a judgment on default.
• A reconciliation clause that is supposed to lower the payment when revenue falls, and that funders rarely honor without a fight.

When cash gets tight, many owners take a second or third advance to keep up with the first. Each one takes another slice of the same receivables. This is called stacking, and it is the point at which most businesses can no longer recover without help.

What a Chapter 11 Filing Does

• Stops the withdrawals. The automatic stay bars the funder from debiting your account after the case is filed.
• Stops the lawsuits and judgments. Pending collection suits are frozen, and a funder cannot enforce a judgment or freeze your account.
• Stops the letters to your customers. A funder may not keep collecting your receivables from the people who owe you.
• Lets you use your revenue. With court approval, the business uses its income to pay employees, suppliers and rent while the case proceeds.
• Puts every funder in one place. Competing liens are sorted out in a single court under a single set of rules.

Is It a Sale or a Loan

This question decides how the advance is treated. If the agreement is a true sale of receivables, the funder says it owns that money. If it is really a loan, the funder is a creditor like any other, its claim can be restructured in a plan, and interest-rate laws may apply. Courts look at what the agreement does, not what it is called: whether repayment is fixed regardless of sales, whether the reconciliation right is real, and whether the owner guaranteed repayment.

A funder’s lien on receivables may also not reach the money the business earns after the case is filed. And payments the funder took in the 90 days before the filing can sometimes be recovered for the benefit of the business and its other creditors. These issues give the business real bargaining power.

Why Subchapter V Fits

Subchapter V is the small business form of Chapter 11. Unless the court orders otherwise, there is no creditors’ committee and no separate disclosure statement. There is no quarterly fee to the United States Trustee. Only the business can propose a plan. The owner can keep the company without paying every creditor in full, as long as the plan commits the business’s projected disposable income for three to five years. See our full page on Subchapter V for who qualifies and the current debt limit.

The Personal Guarantee

The company’s bankruptcy does not erase the owner’s guarantee, and the automatic stay generally protects the company, not the owner. A plan that pays the funders through the business is usually the best protection, because a funder being paid under a confirmed plan has less reason to pursue the owner. In some cases the owner needs a filing of his or her own. See our page on personal guarantees and SBA loans.

Options Short of Bankruptcy

Not every business with an advance needs to file. Depending on the facts, we may demand reconciliation under the contract, negotiate a reduced payoff or a longer schedule, or defend a collection suit on the ground that the agreement is an unlawful loan. A credible ability to file often produces a better settlement. We will tell you which course fits your numbers.

What Our Firm Does

• Review every advance agreement, guarantee and UCC filing.
• Work out what the business can afford from its bank statements, not from projections.
• Negotiate with funders where a settlement is realistic.
• File the Subchapter V or Chapter 11 case and the first-day motions that keep the business running.
• Challenge the funders’ claims and liens where the law allows.
• Propose and confirm a plan.

Frequently Asked Questions

Will filing really stop the daily withdrawals?

Yes. Once the case is filed, the automatic stay prohibits the funder from taking money from the account. We also notify the funders and the bank immediately so that there is no question they know about the case.

A funder sent letters to my customers telling them to pay it directly. Can that be stopped?

A bankruptcy filing stops further collection of your receivables by the funder, and the court can address money the funder is holding. This is often the most urgent reason to file, because a business cannot operate if its customers are paying someone else.

I signed a confession of judgment. Is it too late?

Not necessarily. A judgment entered by confession can sometimes be opened or struck, and a bankruptcy filing stops enforcement of a judgment. Act quickly, because a frozen bank account can close a business in days.

Can I take another advance to get through this?

That almost always makes it worse. Each new advance takes another share of the same revenue and adds another creditor with a lien and a guarantee.

Will I lose my business?

The purpose of Subchapter V is to keep the business operating under the same ownership. Whether it works depends on whether the business is profitable once the advance payments are brought down to a level it can carry.

Get the Withdrawals Under Control

Email msiddons@siddonslaw.com with the number of advances, the amounts being withdrawn and whether you have been sued. We will reply with the list of documents we need. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.