The MCA Industry Built Its Entire Defense Around One Word: Sale
Funders insist that merchant cash advances are purchases of future receivables, not loans. This characterization matters because purchases are not subject to usury statutes. A sale cannot be criminally usurious. And if the transaction is a true sale, the argument goes, bankruptcy cannot discharge it the way it discharges a debt.
Courts have spent years examining whether this characterization holds. Increasingly, it does not.
Recharacterization Is the Central Fight
When a business files for bankruptcy and an MCA funder files a claim, the court must decide what that claim actually is. The test, applied across multiple jurisdictions, asks three questions: whether the agreement contains a genuine reconciliation provision that adjusts payments to actual revenue, whether a fixed repayment term exists, and whether the funder retains recourse against the merchant in bankruptcy. An MCA agreement that answers all three in the wrong direction looks, in the court’s estimation, like a loan.
In 2025, a North Carolina bankruptcy court in Williams Land Clearing, Grading, and Timber Logger v. Apex Funding Source held that the agreement before it was a usurious loan, not a true sale, with an effective rate that exceeded the state’s criminal usury threshold. That holding gave the debtor something no MCA contract ever intended to provide: a defense.
Chapter 7 Eliminates Business Debt, Not Always the Personal Guarantee
A business that cannot survive files Chapter 7, liquidates its assets, and dissolves. If the court recharacterizes the MCA as a loan, that obligation is discharged along with the rest of the business’s unsecured debts. The funder’s daily ACH withdrawal stops. The UCC lien against business assets is addressed through the liquidation process. For a business with nothing left to protect, this is the clean resolution it suggests itself to be.
The personal guarantee is a different matter. Most MCA contracts require the individual business owner to sign a personal guaranty, and that obligation survives the business’s Chapter 7 unless the individual files a separate personal bankruptcy. Owners who close their businesses through Chapter 7 and assume the debt is gone sometimes receive a summons months later on the guaranty. The assumption was wrong.
Filing for personal Chapter 7 passes the owner’s debt through a means test and requires surrendering non-exempt assets. But it can discharge the personal guaranty outright. The question is whether the cure is acceptable to the person who needs it.
Chapter 11 Treats the MCA as What Courts Say It Is
In a Chapter 11 reorganization, MCA claims are classified based on their legal character. A secured claim backed by a valid UCC-1 lien and a perfected security interest receives treatment as a secured creditor. An unsecured claim, or a claim that the court has recharacterized as a loan after the security interest failed, receives treatment as a general unsecured creditor and may be crammed down to a fraction of its face value under the reorganization plan.
The Subchapter V small business reorganization path, available to debtors with debts below a certain threshold, has become an effective tool for businesses carrying MCA obligations. Confirmation of a plan can occur without the consent of the MCA funder as a class, provided the plan meets the requirements for non-consensual confirmation. The funder’s leverage disappears when the plan proceeds without their vote.
The Automatic Stay Is Immediate and Enforceable
From the moment a bankruptcy petition is filed, 11 U.S.C. § 362 prohibits any act to collect, assess, or recover on a prepetition claim. This includes the ACH debits that drain business accounts daily. MCA funders who continue to withdraw after a filing have violated the automatic stay, and the consequences for that violation include damages, attorney fees, and potential sanctions.
Some funders have continued withdrawals anyway, either through inattention or deliberate choice. Courts have not been forgiving. When an MCA company pulled funds after receiving notice of a filing, the resulting proceedings were not limited to the return of those funds.
Avoidance Actions Can Recover Pre-Bankruptcy Payments
The ninety days before a bankruptcy filing are sometimes called the preference period. Payments made to creditors during this window while the debtor was insolvent can be avoided and recovered by the trustee under 11 U.S.C. § 547. For a business making daily MCA withdrawals of several thousand dollars, the preference exposure for a single funder can reach substantial figures across ninety days.
The funder has defenses. The ordinary course of business defense applies if the payments were made consistent with the history of the relationship. But where the funder accelerated collection in the final months, imposed additional fees, or shifted to an aggressive posture, the ordinary course argument weakens. What began as a routine commercial relationship ended as a collection action. That ending is the part the trustee remembers.
A first call costs nothing and assumes nothing, but the window for these arguments is not unlimited. Preference actions have their own deadlines, and every day without counsel is a day the preference period shrinks.
