[Case Study] An MCA Debt Trap: How a Healthcare Business Survived It
E.J. Simonsen | Mar 9, 2023
No business owner anticipates filing for bankruptcy. However, when faced with unexpected challenges and the potential loss of the business, a business debt restructuring bankruptcy, such as Chapter 11, should be considered.
Chapter 11 business bankruptcy enables businesses to restructure their debts while continuing to stay open and operational. It forces creditors to renegotiate payment terms that the business can afford and can even help owners resolve personal guarantee obligations, especially when it comes to merchant cash advances (MCAs).
To learn more about how Chapter 11 bankruptcy can help businesses overcome seemingly unsurmountable conditions, read this case study for details on how The Lane Law Firm helped a healthcare-specialized small business in Texas wipe out $555,136 of MCA debt with Chapter 11 bankruptcy.
CLIENT: A Texas Small Business Unknowingly Lured into an MCA Debt Trap
Triniti DME Solutions, LLC is a provider of durable medical equipment for the management of chronic pain. While the owner devoted his career to delivering high-quality healthcare solutions to those who needed them, he found himself in need due to a financial hardship and was lured into a debt trap by an unscrupulous MCA broker and lender.
CHALLENGE: Overwhelming Debt & Predatory MCA Collectors Who Violate Bankruptcy Laws
By the time our client contacted The Lane Law Firm, the business had accumulated nearly $1 million in MCA debt. After evaluating options, Chapter 11 bankruptcy was the only guaranteed restructuring solution. Over $1.25 million in debt was restructured, including the aforementioned $555K+ reduction in MCA debt, resulting in a once again profitable and solid business model free from the high-interest debt trap.
However, one MCA lender waited until the bankruptcy case was resolved to file a lawsuit and pursue our client and his business! They justified this by stating that they didn’t file a proof of claim or participate in the bankruptcy.
Unfortunately, this isn’t uncommon. MCA collectors attempt to justify their actions by stating:
- They did not file a proof of claim or otherwise participate in the bankruptcy;
- The contract specifies that the business owner did not intend to file bankruptcy or that the business owner agreed that, even if bankruptcy was filed, he would still owe the debt;
- They don’t care about the business’s bankruptcy filing, and they plan to pursue the owner under the personal guarantee clause.
SOLUTION: $1.25 Million in Restructured Debt, a Show Cause Motion & an Educated, Truthful Interpretation of MCA Contracts
Our client’s MCA lender didn’t back off with their lawsuit until told we’d file a "show cause" motion. When granted this compel an officer of the MCA company to come to Texas and tell the judge in person why that officer and the MCA company should not be held in contempt of court. Failing to show up for a show cause hearing can result in being arrested by a U.S. Marshal and being brought before the court in handcuffs.
Even if the MCA lender had shown up to the show cause hearing, there were plenty of reasons why they wouldn’t have succeeded in the lawsuit, including:
- Creditors cannot simply “opt out” of bankruptcy by choosing not to file a claim. If so, every creditor would.
- The lender was lying. Their contracts don’t trump federal bankruptcy law.
- It’s unlawful to pursue a guarantor (owner) when the borrower (business) is protected by the bankruptcy automatic stay provision, which also extends to confirmation or discharge injunction orders.
- It’s unlawful to pursue a guarantor (owner) if the borrower (business) is not in default. The business is not in when paying the court's newly determined amount. Moreover, when the amount is $0 it's impossible to be in default.
RESULTS: $555,136 of MCA Debt Eliminated & Personal Guarantee Obligations Resolved
Once we threatened to file a show cause hearing, our client’s MCA lender dropped the lawsuit. Thanks to this approach, The Lane Law Firm was able to eliminate our client’s MCA debt and resolve all personal guarantee obligations.
Our client was still left with other restructured debts from the Chapter 11 bankruptcy, but the amount was much more manageable with the MCA obligations gone.
CONCLUSION: Chapter 11 Bankruptcy - A Way Out of MCA Debt and Personal Guarantee Obligations
Bottom line, MCA debt can be a nightmare for businesses in Texas, but there is a way out. Chapter 11 bankruptcy can help you restructure your debts and take care of personal guarantees that put your personal assets at risk. As this case study illustrates, this business owner was able to wipe out over $555K of MCA debt and save his company from predatory lenders.
If you need help with your debt situation, don’t wait any longer - book a free, no obligation consultation today. We will help you find the best solution for your business and prepare you for future success. If you need help exploring your debt restructuring options or deciding if bankruptcy is right for you, contact our team. Don’t delay. Help is here, and you may be able to save your business from closing down.