Merchant Cash Advances Are Piling Up in Small Business Bankruptcies

Bloomberg Law reported that more than 230 bankruptcy cases in 2025 involved merchant cash advance debt, marking a sharp increase in businesses seeking court protection from MCA creditors. The analysis reveals a pattern: companies drowning in multiple MCA deals with rates that bankruptcy attorneys are increasingly challenging as usurious loans disguised as sales.

The cases tell a stark story. Rogers Landworks LLC filed Chapter 11 with 21 separate MCA deals totaling $3.6 million. A Subway franchisee operating 43 stores carried a $1.4 million MCA with a 94% annualized rate. Pat McGrath cosmetics listed $3 million in MCA obligations alongside $43 million in secured debt. These are not outliers—they represent a growing segment of the bankruptcy docket.

"I can't think of a case in a long time where I haven't seen them," Kathleen DiSanto of Bush Ross PA told Bloomberg Law. The ubiquity of MCA debt in bankruptcy proceedings reflects both the industry's rapid growth and its role as a lender of last resort for businesses that traditional banks won't touch.

For business owners currently trapped in daily ACH debits, these bankruptcy cases offer both warning and opportunity. The warning is obvious: multiple MCA deals create a debt spiral that often ends in court. The opportunity lies in how bankruptcy judges are treating these arrangements—and what that means for your legal options now, before filing becomes necessary.

Courts Are Questioning the "Sale" Fiction

The most significant development emerging from these bankruptcy cases is judicial skepticism about MCA funders' central legal claim. MCA contracts insist they are purchasing future receivables, not making loans. This distinction matters because loan regulations—including usury caps—don't apply to sales.

Patricia Fugee of FisherBroyles LLP, who represents businesses in bankruptcy proceedings involving MCAs, observed a shift in how courts view these deals. "MCA funders are losing on the sale versus loan argument more often than they are winning," she told Bloomberg Law.

A Houston bankruptcy judge recently allowed a trustee to pursue usury claims against an MCA funder, rejecting the company's argument that the transaction was a sale rather than a loan. This ruling opens the door for bankruptcy trustees to claw back payments as usurious and potentially void the underlying agreements.

The legal analysis turns on contract language and business reality. Courts examine whether the MCA truly bought receivables or simply created a payment obligation tied to revenue. When contracts include personal guarantees, confession of judgment clauses, and mandatory daily payments regardless of actual sales, judges increasingly conclude these look like loans with receivables as collateral.

This judicial trend matters for active MCA borrowers because it suggests courts will scrutinize these deals more closely. Bankruptcy protection may offer a path to challenge agreements that state regulators have struggled to address through enforcement actions.

The Debt Spiral Pattern

The Bloomberg Law analysis reveals a consistent pattern in how businesses accumulate crushing MCA debt. Companies start with one advance, then take additional deals to cover daily payments on the first. Rogers Landworks's 21 separate MCA arrangements illustrate this progression taken to an extreme.

Each new MCA adds to the daily payment burden. A business pulling $2,000 daily to service existing advances might need $10,000 from a new funder just to maintain cash flow for two weeks. The new advance carries its own daily payment, typically $300-500 per day, creating an immediate need for additional funding.

Avant Gardner, the company behind Brooklyn's Mirage venue, exemplifies this cycle. Court documents show $11 million in prior MCA funding before the bankruptcy filing. The venue's seasonal cash flow—concentrated in summer months—couldn't sustain year-round daily payments, forcing additional advances during slow periods.

This pattern suggests that multiple MCA deals are not a sign of business growth but of approaching insolvency. If you're considering a second or third MCA to cover payments on existing advances, the bankruptcy cases provide a clear preview of where that path leads.

What Bankruptcy Means for MCA Debt

When businesses file bankruptcy with MCA debt, several immediate changes occur. The automatic stay halts all collection activity, including daily ACH pulls. MCA funders must stop debiting accounts and cannot contact the business directly.

The bankruptcy trustee then examines each MCA arrangement to determine if payments can be recovered as preferential transfers or fraudulent conveyances. If the court finds the MCA was actually a usurious loan, the trustee may seek to void the agreement entirely and recover all payments made.

MCA funders typically file claims asserting their security interests in receivables. But if the court determines the transaction was a loan rather than a sale, those security interests may be invalid. The MCA debt then becomes unsecured and eligible for discharge.

The Pat McGrath cosmetics case illustrates this dynamic. The company's $3 million in MCA obligations sit alongside $43 million in secured debt. If the MCAs are reclassified as unsecured loans, they receive lower priority in the bankruptcy distribution and face potential discharge.

Chapter 11 proceedings offer additional options. Businesses can reject executory MCA contracts and negotiate new payment terms through a reorganization plan. Courts have broad discretion to modify payment schedules and reduce principal balances when they approve reorganization plans.

Strategic Considerations Before Filing

The increase in MCA-related bankruptcies creates new leverage for businesses considering their options. Bankruptcy attorneys report that MCA funders are more willing to negotiate when faced with potential Chapter 11 proceedings, particularly if the deals appear vulnerable to usury challenges.

Patricia Fugee's observation that MCA regulation "begs for education" points to a knowledge gap that sophisticated borrowers can exploit. Many MCA funders rely on borrowers' unfamiliarity with their legal rights. Businesses that understand bankruptcy's impact on MCA debt enter negotiations with stronger positions.

The timing of bankruptcy filing affects outcomes significantly. Payments made within 90 days of filing may be recoverable as preferential transfers. Daily ACH debits during this period create extensive paper trails that trustees can use to claw back substantial sums.

Asset protection before filing requires careful planning. Courts scrutinize transfers made in anticipation of bankruptcy, but legitimate business transactions remain protected. Moving assets to secure creditors or paying critical suppliers can preserve business value while positioning MCA debt for discharge.

Geographic considerations matter as well. The Houston judge's willingness to pursue usury claims against MCA funders may not extend to all jurisdictions. Businesses with operations in multiple states should consider where to file and which court offers the most favorable precedents for challenging MCA arrangements.

The Bloomberg Law analysis suggests 2026 will bring even more MCA-related bankruptcy filings. For businesses currently struggling with daily payments, these cases provide both cautionary tales and strategic roadmaps. The key is acting before the debt spiral reaches the point where Rogers Landworks found itself—managing 21 separate daily payment obligations with no path to profitability.

The Debtura contract analysis tool can help identify which clauses in your MCA agreement might be vulnerable to challenge in bankruptcy proceedings.