Most US small businesses can now restructure their merchant cash advance debt in 2026. There are many methods of restructuring MCA debt, but the right method depends on each situation, and some of the methods can be potentially risky. The methods include: reconciliation request (based on the reconciliation clause in the MCA agreement), modification or settlement with the individual funder, legal challenge (this involves proving the MCA advance is actually a loan), or filing for a Subchapter V bankruptcy. The appropriate method depends on many factors, including the wording of the reconciliation clause of the MCA contract, state laws, whether the funder has a judgment or a confession of judgment, whether the company has stacked advances and whether the debt is under the maximum amount allowed for bankruptcy.
Disguised Loan
Merchant cash advances are offered under the legal status of an agreement to purchase future receivables, not loans. This distinction is relevant as the usury laws only govern loans. In a case, LG Funding, LLC v. United Senior Properties of Olathe, 2020, in New York State, the Appellate Division, Second Department, New York considered the facts to determine whether the funder was entitled to repayment no matter what. They had to determine whether the contract had a reconciliation clause, whether it was for a specific period of time, and whether the funder had recourse in the event of the merchant filing for bankruptcy. The contract in question allowed for the funder to make changes to payments in their sole discretion, and made filing for bankruptcy a form of default. The court ruled that the merchant was allowed to present their case under the usury laws.
It is also worth noting that the LG Funding test is not trivial in New York. The New York Court of Appeals held in Adar Bays, LLC v. GeneSYS ID, Inc. (2021) that a corporation could raise the criminal usury defense. A loan with a rate higher than the 25% criminal usury rate is void ab initio, and the lender cannot recover the principal and interest. Loans of $2.5 million or more are not subject to the New York usury laws. In 2023 the Second Circuit upheld the decision in the Fleetwood Services case that an MCA was a usurious loan. Fleetwood was offered $100,000 in exchange for $149,900 of receivables. It only received $44,500, and the funder took $119,617.
Bankruptcy courts applying New York law have reached opposite results depending on contract wording. In In re Williams Land Clearing, Grading & Timber Logger, decided in the Eastern District of North Carolina in May 2025, the court found an MCA was a disguised loan carrying an effective rate of 101.1 percent and declared it void. That let the debtor pursue recovery of payments and object to the funder’s claim. In In re Global Energy Services, decided in Maryland in March 2025, the court found a true sale. The reconciliation clause there was enforceable, the deal had no fixed term, the funder assumed insolvency risk, and bankruptcy was not a default.
Reconciliation
Reconciliation is usually the cheapest first step. Many MCA contracts contain a clause that lets the merchant ask for payments to be adjusted to match actual revenue when sales fall. Funders typically require prompt notice and documentation, such as bank statements showing the drop in receivables. Some practitioners argue that a funder’s refusal to reconcile may support treating the advance as a loan, but that outcome depends on the contract and the governing state’s law. When a clause leaves adjustment to the funder’s sole discretion, as in LG Funding, the merchant has little contractual leverage. The same wording, however, can strengthen the argument that the deal is really a loan.
Negotiation: One alternative is to negotiate with each funder to agree to accept smaller debits or weekly (instead of daily) debits, a longer term, or a reduced payoff. If the business has received multiple advances, it must negotiate separately with each funder. This is often a highly challenging process, especially if the merchants are hit by an aggressive funder who throws a monkey wrench into the entire restructure process. Refusing to make payments without a plan for the transaction can cause the funder to accelerate payment of the full balance, file a lawsuit and freeze accounts, and can also cause the funder to send notices to the merchant’s customers to pay them directly under the Uniform Commercial Code (section 9-406). Settlement firms usually charge 15 to 25% of the savings or a flat fee retainer. An offer to reduce payments by 80% is a red flag.
Confession of Judgment
A confession of judgment is a signed document allowing a merchant cash advance firm to go to court and win a judgment without suing. On August 30, 2019, New York changed CPLR 3218 to state that a confession of judgment may only be filed in the county in which a debtor lived in New York. This effectively eliminates confessions of judgment being filed against out-of-state businesses. This change was made after reports that cash advance firms had filed more than 25,000 confessions in 4 years. Businesses in New York are still at risk for the confessions of judgments filed in their counties. Texas went a step further in their legislation with House Bill 700 which added chapter 398 to the Texas Finance Code effective September 1, 2025.
This law applied to sales-based financing with less than $1 million which included out-of-state providers. Section 398.055 of the law states that any contracts with a confession of judgment clause are void and unenforceable in their entirety. The law also restricts a provider from automatically debiting an account without a first priority perfected security interest and states that the providers must register with the Office of Consumer Credit Commissioner on or before December 31, 2026. New Jersey banned confession of judgment clauses in commercial financing agreements in 2020. Virginia banned them in sales-based financing in 2022.
Enforcement
Enforcement has also changed the negotiating landscape. In January 2025, New York’s Attorney General announced a $1.065 billion judgment against Yellowstone Capital and its affiliates. The Attorney General alleged that Yellowstone made loans disguised as MCAs, with rates as high as 820 percent, and took fixed amounts regardless of revenue. Yellowstone must cancel more than $534 million owed by more than 18,000 businesses nationwide, vacate unpaid judgments and release certain liens, and it did not admit wrongdoing. The case continues against Delta Bridge Funding and Cloudfund, which took over Yellowstone’s operations in 2021.
Federal and New York regulators have targeted collection tactics as well. On February 14, 2024, a federal court ordered MCA operator Jonathan Braun to pay $20.3 million after the FTC’s first-ever jury trial. The total included $3,421,067 in redress and $16,956,000 in civil penalties, and Braun received a lifetime industry ban. The FTC had alleged that confessions of judgment were used to seize assets in ways the contracts did not permit. New York’s FAIR Business Practices Act took effect February 17, 2026. It lets the Attorney General pursue unfair and abusive practices that harm businesses, although only the Attorney General can enforce those new prohibitions.
Subchapter V Bankruptcy
The subchapter V bankruptcy is a court-administered plan. When a person files for this bankruptcy, an automatic stay is put into place, which stops all collections. Currently, a person may file for subchapter V bankruptcy if their combined debts are $3,424,000 or less, and at least half of their debts were business debts. Generally, the person will have to file a plan within 90 days, a trustee is appointed, and there is no creditors’ committee unless one is ordered by the court. The absolute priority rule will not apply in this case, so owners can retain their business while making payments with disposable income for 3-5 years. H.R. 7730 was passed in Congress in September 2026 to increase the limit to $7.5 million for cases filed after the bill’s enactment. As of early October 2026, it was awaiting the president’s signature.
Tax Consequences
Any debt that is forgiven may result in tax consequences. Debt that is cancelled is normally considered to be income by the IRS. If debt is forgiven the creditor must complete and file a Form 1099-C for debt that has been forgiven of $600 or more. Section 108 of the Internal Revenue Code excludes debt cancelled in a bankruptcy case. For debt cancelled outside bankruptcy, Section 108 excludes cancelled debt only to the extent that a business was insolvent, meaning that its liabilities exceeded the value of its assets, immediately before the cancellation. Thus, for instance, a business with $300,000 in liabilities and $250,000 in assets, and $80,000 in cancelled debt, would exclude $50,000 and be taxed on $30,000. Amounts excluded are applied to reduce tax attributes such as net operating loss, and are claimed on Form 982.
