Do you know the feeling of going to your checking account every morning and seeing that some money was taken out overnight? If that money is going to a merchant cash advance company, you may be wondering whether Subchapter V can stop it. The short answer is yes. Once your business files under Subchapter V, the automatic stay kicks in - this legal principle essentially puts a pause button on nearly all debt collection activity. That means the MCA company can’t keep scooping up cash from your account. This reprieve can be a real game changer for a business on the brink, giving it some breathing room to stabilize its cash flow.
An automatic stay is a standard feature of bankruptcy proceedings, which means that it goes into effect when a company files for bankruptcy. The automatic stay halts collection actions that creditors are currently taking against the debtor. For a business with merchant cash advances, that means all withdrawals, phone calls, restraint notices, etc., must stop immediately. If the MCA funder has issued a restraint notice, they must retract it. The same goes for restraint letters it has already sent to your customers. This action alone can help alleviate your cash flow challenges.
What an MCA Really Is
To see why that matters, it helps to look at what an MCA really is. Although MCAs are often called loans, they are not technically loans. In simple terms, you get a lump sum of money upfront from the MCA company, and in return, you pay them back over time. But here’s the twist: you’re not paying back a loan in the traditional sense with interest. Instead, you’re remitting a percentage of your daily or weekly sales to the MCA company. The payments are automatic - they’re deducted right from your bank account, so it can feel like they’re taking their cut every single day. Despite their high costs, MCAs are able to slip through the cracks due to their unique structure and the fact that they are not considered “loans.” The rules and protections that apply to typical business loans usually don’t apply to them.
The cost is where it really hurts. A factor rate is a multiplier that is applied to the amount of an MCA advance to determine the amount to be repaid to the MCA provider. Typical factor rates run from 1.1 to 1.5 or higher, so a $100,000 advance can mean repaying anywhere from $110,000 to $150,000, depending on your contract. In the real world, most owners just do not know how to compare a factor rate to an interest rate, but converted to an effective APR, an MCA can cost 70% to 400%, a number we can only describe as “wicked high.” Origination fees, administrative fees and hidden charges get stacked on top.
Here’s the pattern we see again and again. A business hits a rough patch and takes an MCA for quick help. But the repayment terms are so steep that the business struggles even more to keep up. Soon, they need another MCA just to cover the last one. This leads to a cycle of MCAs where a business is constantly borrowing to stay afloat, and never truly gets a chance to catch their breath and recover. Debt snowballs, and soon the MCAs have a chokehold on the business.
And when the payments finally stop, the MCA company sends restraint letters to your customers, demanding that they remit their payments to the MCA company instead of you. It sends restraint notices to your credit card companies, too. The money that was supposed to come to you for your products and services vanishes, and you can’t pay the vendors and employees who have been there for you. The days can go by with just an intense sense of panic. Eventually it gets to the point where the business just can’t survive anymore.
The Automatic Stay
This is where the automatic stay comes into play. It acts as a shield against collection efforts, providing a temporary reprieve. It stops all the remaining payments that were coming out of your bank account every day, which can give your business some much-needed time to regroup. When you file a Subchapter V petition, the automatic stay immediately prevents your creditors from reaching for any more of your money or taking any other collection actions. Yes, you still owe all that money, but the automatic stay stops all collection. The MCA company can’t keep stealing your money every morning. You get a breather.
Subchapter V is a specific subset of Chapter 11 bankruptcy that applies only to small businesses. Like regular Chapter 11, it lets the business keep operating, and a debtor who files under Subchapter V will restructure their business debt. That means you can keep paying your vendors, your employees, and anything else that keeps the business running smoothly. The MCA funder can’t take the money from your account. You can get your business back on track and start planning for the future. That’s the goal: to use the breathing room you get with the automatic stay to get a plan together. Your Subchapter V plan will lay out how you’re going to restructure your business and its debt, over a defined period of time. The aim is a plan that resolves all of the debt, so the business comes out of bankruptcy in a better position.
Treat MCAs as Loans
MCA funders have another problem in bankruptcy court. MCA companies typically argue that they are purchasing a portfolio of future receivables, and not making a loan. Courts are starting to see them as loans disguised as purchases of receivables. A recent NY case shows a glimpse of how this argument is shifting. Judges are beginning to look past the label and treat MCAs as loans. That matters, because treating MCAs as loans may make them subject to loan laws, which can open the door to disallowing the debt.
None of this means bankruptcy is the right move for every business. For some, negotiating with the funders may be enough. But for others, the debt is just too high to keep servicing. Many owners put off filing at all costs and spend a lot of money on other avenues that don’t work. Businesses take out MCAs when they need fast cash, but sometimes they get trapped in a cycle of debt, and their finances get even more constrained. The key to surviving this scenario is stopping the cash drain immediately, which bankruptcy can do for you. The Subchapter V automatic stay gets you time to regroup, and your bankruptcy plan provides a way forward. If you’re not sure which way to go, the best thing you can do is find a Subchapter V bankruptcy attorney and get a roadmap and strategy.
