Subchapter V With MCA Debt: 7 Decisions Before Filing

Seven Things to Decide Before Filing

A Subchapter V filing can protect the business at once, because it blocks the daily withdrawals, letters to customers and lawsuits. Repayment is spread over three to five years from what the business can afford, and the owner keeps the business. But there are seven things to decide before filing.

Merchant cash advances depend on daily withdrawals from the bank account of the business. The daily withdrawals can choke off daily cash flow and make payments impossible. An additional MCA may feel like a relief, but there may be a price beyond the advertised total payback. Each new advance is just taking a slice of the same receivables. This is called stacking. Even worse, lenders sometimes have the owner sign a security agreement with a lien and confession of judgment.

The first call is always about qualifying for Subchapter V. The debt ceiling has been raised to 3,424,000 dollars, at least half of it from operating the business; insider debts do not count. Single-asset real estate companies are not eligible. Congress has passed a bill raising the limit to $7,500,000. However it still must be signed by the President, and as of this writing it hasn’t been. And that’s why you want to stay under that 3,424,000 dollar threshold. Then there will likely be no creditors’ committee; no disclosure statement; and no quarterly fees to the U.S. trustee. In this case, only the debtor can propose a plan of repayment.

Next comes viability, since Subchapter V keeps the business under the same owner, even though creditors may not be paid in full. Is the business able to make enough money to justify carrying on? When a business is viable but not profitable because of the debt load, the plan sets out how much will be paid each month over three to five years from the net income that’s left over after paying monthly costs. What the owner must show is that the business is able to service these payments. If not, Subchapter V just sets up the business to fail. Funders and other unsecured creditors can vote against the plan. If the plan is not approved, the court can still impose it if it is “fair and equitable” and puts in all the disposable income for at least three years, up to five. Also, unless the creditors agree, the discharge of debt only comes after the plan payments are made. An appeals court ruled in 2024 that a funder’s fraud claims against the business can survive a Subchapter V discharge.

Then the funding agreement must be examined to see if the money is really a sale of receivables or a loan. Courts look at what was really done, not what it was called. Just calling something a purchase of receivables is how funders avoid the usury laws about interest rates. If the money was really a sale of receivables, the funder is going to claim it owns the money. If the agreement really was a loan, the funder is a creditor like any other, and its claim can be restructured in the plan to make the payments affordable. In that case, state interest laws may apply. Judges ask what happens to payments when sales are up or down, if there is a right to make adjustments, and if the owner guaranteed it. In July 2026, a New York bankruptcy court found all nineteen agreements it reviewed were loans, instead of sales of receivables. There, because of the daily debits and total payback, the payments seem to set a loan term of 189 days from the deposit.

Then there’s the urgency of filing. Once the funder is calling your customers, telling them to pay the funder instead of you, or serving the confession of judgment and freezing the bank account, the business can be only days away from closing. The automatic stay that goes into effect when the case is filed stops payments to the funder, as well as lawsuits and judgment enforcement, so the business can get immediate protection. The court can help you deal with money the funder is holding. Just as important, if the business doesn’t have a way to collect its own receivables, it can’t stay in business. All its funders are going to end up in one court. Even a confessed judgment can sometimes be “opened”. Never take another advance to buy time. It only makes the problem bigger, because it will have to be paid back along with the last one.

Next is the money the funders already took out in the 90 days before filing. Those payments can sometimes be recovered as a “preferential payment” that favored one creditor over others. Transfers under $8,575 total can’t be recovered. Although a funder’s lien can reach money earned before the bankruptcy is filed, the lien may not attach to money earned after that. If there’s a dispute over the lien, that gives you leverage in getting the funder to agree to restructure the claim.

You also need to consider your own personal guarantee. A bankruptcy for the company usually leaves intact your personal guarantee, and generally only the company, not you, is covered by the automatic stay that is in effect once the filing is made. Making payments through the plan provides more protection for you, because the funders are less likely to pursue personal collection when they are being paid. If the funders are threatening to come after your personal guarantee, a personal case may still be necessary.

If you file Subchapter V, you’ll also want to be ready for the deadlines that follow. The plan is due within 90 days, and a status conference with the court within 60. The filing fee is $1,738. Also, the statute says you need to submit a report 14 days before the status conference showing your efforts to get a plan approved by the creditors. As long as the court approves, the business keeps using its income for payroll, suppliers and rent.

You Might Not Have to File at All

This process isn’t for every business. If you can negotiate a reduced settlement or a payment plan you can afford, you might not have to file at all. You can demand that your funders reconcile your accounts, negotiate a reduced payoff or longer schedule, or, if necessary, defend a lawsuit, where a credible ability to file can often bring a better settlement.