In almost every case you can settle your merchant cash advance for less. The downside is that you will have to pay with cash, you need to sign a release, and you may be subject to taxes.
Why would an MCA funder settle for less?
An MCA funder will settle for less because their actual exposure is far less than what is on paper. For example, in an MCA contract filed with the SEC, the MCA company only gave the merchant $250,000.00 for a purchased amount of $357,500.00. So, if the merchant had delivered $200,000.00, the funder would only be short $50,000.00 even though the contract shows a remaining balance of $157,500.00.
Second, MCA contracts charge massive penalties upon default. In that contract, the funder charges 25% of the Undelivered Amount (or $5,000.00) as Default Damages, 9% interest, as well as expenses.
Third, litigation over MCAs is far from a sure thing for the funder. The Appellate Division, First Department, found that over 3,000 MCAs were actually loans in People v Richmond Capital Group (Feb. 2026), and the New York Attorney General canceled $534,552,724.00 of MCA debt in her January 2025 settlement with Yellowstone Capital. Of course, the Appellate Division, Second Department, held that a merchant who never requested a reconciliation couldn’t call the MCA illusory in Apollo Funding v Dave Reilly Construction (2025). How much do MCAs usually settle for? explains this in greater detail.
What are the downsides to settling a merchant cash advance for less?
There are typically three downsides:
| Factor | Impact | Mitigation |
|---|
| Liquidity | Lump sums get the biggest discounts | A payment plan with notice and cure and a capped default judgment |
| Legal Claims | A release waives claims like usury, recharacterization, and over collections | A mutual release naming all guarantors that fixes liens and judgments |
| Tax | Forgiven debt is generally taxable income | Work with your CPA to see if you can invoke the insolvency exclusion |
Is it better to settle my MCA for a lump sum or with a payment plan?
Paying a lump sum usually gets you a deeper discount. However, lump sums can drain needed cash. The downside of a payment plan is that the MCA will try to add penalties upon default. See, e.g., Diesel Funding v Build Retail, 2026 NY Slip Op 02629 (2d Dept. 2026) (a $1,476,330.68 default judgment because the stipulation allowed judgment for the settlement amount plus 20% of the remaining amount “without any notice”). Try to negotiate a payment plan with a notice and cure period and a capped default judgment of the original amount less the payments that you made. See How much can MCA debt be settled for? for typical percentages by stage.
What claims am I giving up when I settle my MCA?
Typically, you will be giving up all of your claims against the MCA, and in New York a written release is effective even without consideration or a seal. See General Obligations Law § 15-303. You may have claims for usury (NY corporations can plead criminal usury when they are charged more than 25% interest, General Obligations Law § 5-521), recharacterization, and overcharges. In California, a general release doesn’t reach unknown claims unless it includes the waiver in California Civil Code 1542, so look for that provision.
In return, you need to make sure you get:
- Mutual releases covering the business and each guarantor by name (the personal guarantee is a separate contract).
- A UCC-3 Termination, which the funder must file within 20 days of an authenticated demand once nothing is owed. See UCC 9-513, and the $500 statutory damages in UCC 9-625 for failing to do so.
- For a New York judgment, a satisfaction-piece filed within 20 days of full satisfaction under CPLR 5020, with a $100 or $500 penalty for delay.
- A written revocation of the funder’s ability to charge your account via ACH.
Do you owe taxes on a settled merchant cash advance?
In many cases, yes. Under IRS Publication 4681, debt you were liable for is generally taxable income when canceled for less than full payment. You must report it “even if you didn’t receive a Form 1099-C.” Under the Form 1099-C instructions, a negotiated settlement is an “identifiable event.” The 1099-C will not be issued to the guarantor, but if you own a pass-through entity, the income passes through to your personal tax return.
Pursuant to 26 USC 108, you may be able to exclude the canceled debt if you are in a bankruptcy case or you were insolvent, meaning your liabilities exceeded the fair market value of your assets immediately before the cancellation. For a partnership or multi-member LLC taxed as one, insolvency is determined at the partner level. For an S-Corp, it is determined at the corporate level. You will need to file IRS Form 982 and reduce your tax attributes (e.g., NOL carryforwards and basis).
As a hypothetical, if you settled a $100,000 MCA balance by paying $55,000 and you are in the 24% bracket, you could owe $10,800 in federal income tax on the $45,000 of canceled debt. However, if you were insolvent by $30,000 immediately before the settlement, you can exclude that $30,000 and only pay taxes on $15,000.
Frequently Asked Questions
Will I get a 1099-C if I settle my MCA?
You may or may not. The IRS only requires 1099-Cs from an organization whose significant trade or business is lending money. If the MCA funder treats the advances as purchases of receivables, it may or may not file one. Either way, you must report the canceled debt.
Will settling my MCA get me out of my personal guarantee?
It can, if the settlement agreement specifically releases you by name, in addition to the business. The personal guarantee is a separate contract.
Can I just send the MCA funder a check marked “paid in full”?
It is not as secure as a signed settlement agreement. Under UCC 3-311, a “paid in full” check only discharges the debt if the claim was disputed, the payment was made in good faith, and the check conspicuously stated it was in full satisfaction of the claim. Even then, the funder has 90 days to send your money back and undo the settlement.
Should I settle my MCA if I believe it is an illegal loan?
If you settle, you will almost certainly sign a general release of your claim. New York courts have ruled that some MCAs are loans, and it is a crime to charge a corporation a rate over 25%, but your MCA funder may be able to raise a number of defenses. Weigh the strength of your claim against the discount you are being offered.