Chapter 7 Is Not the Easy Exit the Name Suggests
Liquidation sounds final because it is. When a business files Chapter 7, it ceases to operate, surrenders its assets to a trustee, and receives a discharge of its qualifying debts. For a business that has no future worth preserving, this is a rational outcome. For a business owner who signed a personal guarantee on every MCA agreement, it is the beginning of a separate problem.
The Recharacterization Question Still Applies
Even in a Chapter 7 liquidation, the characterization of the MCA determines how it is treated. If the trustee or the debtor’s counsel can establish that the agreement was a disguised loan rather than a true sale, the claim becomes an unsecured debt dischargeable in the ordinary course of the liquidation. If the court treats it as a genuine purchase of future receivables, the analysis shifts to whether those receivables still exist, whether they attach to assets of the estate, and whether the funder has a perfected security interest.
In practice, courts applying the three-factor test have found many MCA agreements to be loans. The reconciliation provision that exists only on paper, the effective fixed repayment term disguised as a variable one, and the personal guarantee that ensures the funder receives payment regardless of business performance all point toward a credit transaction rather than a commercial purchase.
The funder who insists this is a sale of receivables, not a loan, must explain why its contract includes a personal guaranty. Receivables do not require a personal guarantor. Loans do.
The Personal Guarantee Survives Unless the Individual Files Too
This is the fact that surprises most business owners. A Chapter 7 filing by the business entity does not discharge the individual owner’s personal liability under a personal guarantee. The business dissolves and the business debt disappears, but the individual who signed personally remains exposed to a direct lawsuit on that guarantee.
The solution is a personal Chapter 7 filing, which discharges the individual’s qualifying unsecured debts, including the personal guarantee. The cost is the means test, the asset disclosure, and the effect on personal credit. Whether those costs are acceptable depends on the magnitude of the personal exposure and the individual’s broader financial picture. There is no universal answer, and anyone who tells you otherwise is estimating.
The Trustee Can Pursue the Funder
A Chapter 7 trustee’s job is to maximize recovery for unsecured creditors. This sometimes means suing the MCA funder to recover preferential payments made in the ninety days before filing. If the business was insolvent and making daily ACH payments to an MCA funder while other creditors received nothing, the trustee has a basis to pursue those payments as preferences under 11 U.S.C. § 547.
The funder’s best defense is the ordinary course of business exception. But if the final months before the filing involved escalating fees, default notices, and accelerated collection, the ordinary course argument loses credibility. The trustee sees the whole record.
What Remains After Chapter 7
After a business Chapter 7 is complete, the discharge covers the business entity’s debts. The personal guarantees, if addressed by a separate personal filing, are discharged. The UCC-1 lien on business assets is resolved through the liquidation process. What remains is the credit consequence, the loss of the business, and the question of what the owner does next.
For some, that question is already answered before the petition is filed. For others, the Chapter 7 process creates the space to answer it without a daily ACH withdrawal consuming whatever revenue remains. Consultation is where that conversation begins.
