MCA Debt Relief Options in Minnesota

If your business in Minnesota is buried under merchant cash advance payments, you have three real options: settle, sue, or file bankruptcy. Deciding which option to choose involves many factors. For one thing, the total value of your debts and their types can limit or expand your choices. Waiting is never the best choice with an MCA debt. The longer you wait, the more cash flows out of your business and into your lender’s pockets. That gives you less room to strike a good bargain.

An MCA is more like cancer than a revolver. The lender takes your money, by the day or week, whether sales are up or down. Many lenders do not lower the amount they take out to keep pace with your sales. As a result, many MCA borrowers take out a second one, to cover the payments on the first. They’re stacking them, and the multiplying payments are crushing their business.

Your Contract Is Really a Loan

MCA lenders play up the argument that their product is not a loan but a purchase of future receivables. But the effect on the borrowers’ businesses is the same. Courts are increasingly looking past the technical language in the contract, to what the practical effect is on borrowers.

The purchase argument works best when there is a true reconciliation, where the rate of repay falls with the borrower’s sales. Judges look at reconciliation clauses to see if they actually do force the amount owed downward. They also ask whether the repayment amount is fixed no matter what happens to your revenue, and whether the lender has recourse against you if you default.

Many MCA borrowers say that asking for a reconciliation was a losing battle. Getting the rate lowered took too much time or was never an option, no matter what happened to their sales. If MCA funders refuse to lower the repayment amount when your sales go down, or demand that you pay a fixed amount regardless of your ups and downs, then the practical effect is that they are not sharing any risk.

If you want a court to decide your contract is really a loan, you can point to things in the contract that signal it’s really a loan. Think about the guaranty or collateral you put up: does it look like a loan, where the borrower is personally liable for the debt? For example, in a case called “In re Shoot the Moon,” the court decided that the cash advances were disguised loans, and not true purchases of future payments. The bankruptcy trustee got back over $1.1 million the debtors had paid in.

State Usury Limits

Minnesota has no state law setting terms for disclosures and costs of MCAs. How far the usury law reaches, though, will probably be up to the Minnesota appeals courts to settle.

State usury limits can be a sledgehammer. The general state rate cap on loans is 8% a year. The state also limits business loans under $100,000 to four-and-a-half points above the federal 90-day commercial paper rate. If you paid more than the cap, you can sue to get double the interest you paid. The state imposes no cap on $100,000 or more loans, as long as the parties signed a written loan agreement.

A confession of judgment is a scary legal weapon. But Minnesota doesn’t let you slip a confession of judgment clause into the middle of a funding contract. Your signature on it has to be on a separate piece of paper. Starting August 30th, 2019, though, New York changed its rules to protect merchants. Any business outside New York is safe from a judgment entered through a New York confession of judgment.

But a bigger risk may be closer to home. A funder who has bought your accounts may tell your customers to pay it, instead of you, at least after a default. That interrupts your cash flow, which could be fatal to your business.

Subchapter V

The new Subchapter V of Chapter 11 is a fast-track, smaller version of the standard Chapter 11 bankruptcy. Filing Chapter 11 puts the automatic stay into effect right away. That’s a huge relief for businesses who see their cash shrinking. The stay is a block that drops down to stop lawsuits and ACH cash withdrawals from your accounts. You can keep running the company. Don’t wait to file bankruptcy, though, if there are a lot of recent payments back to the funder. The longer you wait, the smaller the slice of payments you can claw back as preferences.

Inside the bankruptcy you can use more tools to fight your lenders off. Once you are in a case, you can argue your contract should be treated as a loan, not a purchase. You can also defend the claim by asking the court to lower the cash amount, put its claim behind those of other creditors, or even throw it out.

Subchapter V means less paperwork and a quicker approval. For borrowers who file right away, the shorter timeline means there’s less time for debt to accumulate. Delaying until it looks hopeless, on the other hand, makes getting the lenders to settle into the deal less likely.

Not everyone can use Subchapter V.

• First, at least half the debt must come from running the business, not consumer purchases.
• And second, total debt needs to be under $3,424,000. That’s the case if you file on or after June 21, 2024.

If you signed a personal guaranty for a funding contract, a business bankruptcy does not wipe out your personal liability for an MCA loan right away. It can give you leverage to make one global deal, though.

If you settle for less than full value, the IRS usually counts a cancelled debt as income. There are ways out of that trap: if you were insolvent at the time you settled, at least part of the debt forgiveness is not taxable income. A debt forgiven in a Chapter 11 bankruptcy is not taxable either. Both exclusions go on IRS Form 982.

It is tempting to set up another advance to cover the withdrawals. That solves nothing. The takeaway: keep your agenda on top, and get help before your lenders’ agenda controls what happens.