How to Prove Undue Hardship for Merchant Cash Advance Bankruptcy
MCA debt is generally dischargeable in bankruptcy, but the personal guarantee that accompanies most MCA agreements complicates the analysis. If the funder obtains a judgment on the personal guarantee, the merchant’s personal assets are at risk. If the merchant files for personal bankruptcy, the question becomes whether the MCA obligation (or the judgment arising from it) can be discharged.
The Standard and Its Application
The “undue hardship” standard applies specifically to student loan debt under 11 U.S.C. § 523(a)(8). MCA debt is not student loan debt. MCA obligations, whether classified as loans or as purchases of future receivables, are generally dischargeable in Chapter 7 without meeting the undue hardship standard.
Where Undue Hardship Becomes Relevant
The concept of hardship becomes relevant not as a legal standard for discharge but as a practical consideration in the choice between bankruptcy and settlement. A business that can demonstrate genuine financial hardship, revenue that cannot sustain the MCA obligation, may obtain a more favorable settlement than a business whose hardship is less apparent.
In Chapter 11 proceedings, the bankruptcy court may examine whether the MCA funder’s claim is secured or unsecured. If the MCA is recharacterized as a loan, the court may reduce the claim. If the MCA funder failed to file a UCC-1, the funder may be treated as a general unsecured creditor, which substantially reduces the funder’s recovery.
The undue hardship standard does not apply to MCA debt in the way merchants expect. But the economic reality of hardship influences every other decision in the case.
Settlement as the Alternative
For many merchants, settlement produces better outcomes than bankruptcy. Settlement is faster, less expensive, private, and preserves vendor relationships. Bankruptcy is public, slow, costly, and damaging to the business’s commercial reputation.
The choice between settlement and bankruptcy depends on the number and nature of the obligations, the merchant’s personal exposure through guarantees, and whether the business is operationally viable.
Whether bankruptcy or settlement is the appropriate path depends on the contracts and the circumstances. We can evaluate both.
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Disclaimer: This content is for informational purposes only and does not constitute legal advice. Results vary based on individual circumstances. Past results do not guarantee future outcomes. If you are in legal distress, consult a licensed attorney.