Texas Business Debt Settlement: 5 Issues That Now Deserve a Closer Look

If you’re a Texas business owner with debts from a merchant cash advance, a lot has changed. The new HB 700 law since September 2025 covers MCAs. Confession of judgment clauses have been eliminated, automatic debit plans limited. There’s no rate cap so the question of the merchant cash advance being a loan versus a sale still matters. And after settling, there can be personal and tax exposure.

House Bill 700

Starting on September 1, 2025, your business has some added protections under House Bill 700 (HB 700) if it takes out a merchant cash advance in Texas. The new law creates rules for how a non-bank lender can provide funding to your business. If you got a merchant cash advance in Texas before Sep 2025, the pre-HB 700 terms of the agreement still apply.

Funders now have to give clear disclosures to you before you take the cash: the total cost to you, the payment amounts, the terms of the advance. That makes it far easier to compare offers side by side. Only offers under $1 million carry the disclosure duty. Banks and credit unions also avoid the rule. So does real-estate-secured financing. But existing funders will need to register with the state by December 31, 2026.

A confession of judgment comes into play as default occurs under the MCA. For example, if the lender claims you did not make payments on time or comply with the deal, the confession of judgment gives the lender the right to go to court. They can get a judgment against you without the usual legal process of trying the case and proving you were in the wrong. HB 700 does away with confessions of judgment. Any covered MCA contract with a confession of judgment clause is void under HB 700, the clause and the deal. You can also challenge any judgment that has already been entered based on a confession of judgment by raising due process concerns. Under due process, you have the right to proper notice of legal action and a hearing where both sides have an opportunity to present their case. Note that New York banned these clauses against out-of-state businesses in 2019.

Texas is not New York. In Texas, a New York judgment is a ”foreign judgment.” To make that judgment collectible in Texas, it must be ”domesticated.” Under the Uniform Enforcement of Foreign Judgments Act, you can resist a New York judgment being recognized in Texas for lack of jurisdiction, defective service, fraud, or if it would violate Texas public policy.

Before HB 700, a provider could withdraw funds electronically from your business’s bank account whenever they wanted under an MCA. So long as it was for the agreed-upon purchase amount, the MCA provider could automatically debit your account. That is no longer the default. Now an automatic debit is only allowed if the funder holds a perfected first-priority security interest in that deposit account - something most MCA funders don’t have. If your account is being drained or a void judgment is being enforced, a Texas court can issue a temporary restraining order very fast. A merchant cash advance funder can’t simply freeze a bank account. They need a valid court judgment obtained through proper legal process to do so. If the judgment was based on a confession of judgment clause, it may be void, allowing you to challenge the freeze.

HB 700 places no cap on the annual percentage rate (APR) or fee that a merchant cash advance can carry. The state enforces the law, with civil penalties of $10,000 per violation. But businesses have no private right to sue under the law. That is why the old loan-vs-sale argument is still the main leverage.

Recharacterized as a Usurious Loan

An MCA gets structured as a purchase of the future receivables of your company. The funder takes a percentage of your daily or weekly revenue. But this, they argue, isn’t a loan. So MCA companies say they can bypass usury laws and licensing rules. But when you see fixed daily payments, personal guarantees, blanket UCC liens, it starts to look like a loan. Courts are starting to agree. Most MCAs are governed by New York state law. Courts there follow three key factors: can payments change if revenue drops? is there a fixed repayment period? does the provider lose if the business fails? If any of that is missing it starts to look like a loan. At which point usury comes in and effective rates of 50% to 300%+ APR become a risk.

In Texas, statutory penalties for usury can include forfeiting all interest and potentially paying triple damages. MCA funders know court in Texas is expensive and risky for them. Many disputes therefore settle for a fraction of the claimed balance.

If you guaranteed payment, the key factor is whether that guarantee only covers your promises or if it makes you personally responsible for the entire balance. Many guarantees only cover compliance with certain parts of the MCA agreement, not the full amount. Further, if the MCA gets recharacterized as a usurious loan, your guarantee could fall away too. Texas shields a family’s exempt personal property up to $100,000 and current wages generally can’t be garnished by business creditors. Any suit to enforce collection rights must be filed within four years.

Forgiven Debt After Settlement

A forgiven debt after settlement usually comes with a Form 1099-C from the bank, credit union or other big lender. That’s when they forgive $600 or more. The IRS generally treats the canceled debt as taxable income. However, if you were insolvent right before canceling the debt, you may be able to exclude up to the amount of your insolvency using Form 982.

If settlement isn’t possible, Chapter 11 Subchapter V bankruptcy could be an option. The debt limit there is $3,424,000 now that the temporary $7.5 million limit expired June 21, 2024. Once you file, an automatic stay stops all collection activity. Your business keeps operating under court oversight. The MCA debt gets restructured in the court’s repayment plan. Guarantors of the MCA can file Chapter 7 or 13 bankruptcy individually.