Chapter 11 Was Not Built for MCA Problems, But It Fits
The architects of federal bankruptcy law had no reason to anticipate the rise of daily ACH debits, factor rates above 1.5, or contracts that allow a funder to declare default when a business changes banks. But the tools they created work. Chapter 11 was designed to give viable businesses the ability to reorganize around their obligations, and an MCA stack that would destroy the business if left to run is precisely the kind of obligation Chapter 11 was built to address.
The Automatic Stay Stops Every Debit
From the moment the petition is filed, every ACH withdrawal stops. The funder cannot initiate a new debit, cannot contact customers to collect on assigned receivables, and cannot proceed with any pending lawsuit. This immediate halt is not contingent on winning any motion or waiting for a court ruling. It takes effect the instant the case number is assigned.
For a business whose account has been draining by several thousand dollars per day, this is not a procedural technicality. It is the first moment in months that cash flow has been controllable.
Cash Collateral Orders Restore Financial Control
MCA funders frequently argue that their blanket UCC-1 lien gives them a security interest in cash collateral, which means the debtor must obtain court permission before using the funds in their accounts. In practice, courts regularly enter cash collateral orders that allow businesses to operate, meet payroll, pay suppliers, and function normally during the reorganization period. The funder receives adequate protection, often in the form of replacement liens or periodic reports, but loses the ability to drain the account unilaterally.
The shift from unilateral ACH withdrawal to court-supervised cash collateral is, for many business owners, the moment they realize that bankruptcy is not defeat. It is a different arena where different rules apply.
Recharacterization Reduces the Claim
Within a Chapter 11 case, counsel can bring an adversary proceeding to recharacterize the MCA agreement as a loan rather than a true sale. If successful, the court treats the funder as a lender, which brings the obligation under usury analysis, subjects it to potential discharge or modification, and may render the security interest unenforceable in some jurisdictions.
The Eastern District of North Carolina’s examination of MCA agreements in In re Azalea Gynecology provided a framework for this analysis, finding that certain MCA structures satisfied the test for disguised loans and were subject to civil usury defenses. An adversary proceeding in Chapter 11 can present precisely these arguments to a federal court that has jurisdiction over the entire relationship.
Cramdown Reduces What the Funder Receives
A confirmed Chapter 11 plan can force secured creditors to accept reduced payments, stretched timelines, and modified interest rates, provided the plan meets the confirmation standards and the creditor receives at least as much as they would in a Chapter 7 liquidation. For an MCA funder whose security interest is partially or wholly unsecured, the cramdown can reduce the obligation substantially.
Unsecured MCA claims in a reorganization may receive pennies on the dollar over several years. The factor rate that made the original advance so expensive becomes irrelevant when the plan controls the recovery.
Subchapter V Streamlines the Process for Smaller Businesses
For businesses with total debts below the current threshold, Subchapter V of Chapter 11 provides a faster, less expensive reorganization. A single trustee facilitates the process, no creditors committee is appointed, and the debtor can confirm a plan without creditor approval under certain conditions. For a small business crushed by MCA obligations, Subchapter V has become the most practical reorganization tool available.
The confirmation requirements under Subchapter V are less demanding than standard Chapter 11. Plans confirm faster, legal costs are lower, and the MCA funder’s ability to obstruct the process is reduced.
Equitable Subordination Punishes Predatory Conduct
Under 11 U.S.C. § 510(c), a bankruptcy court can subordinate a creditor’s claim to the claims of other creditors when the creditor engaged in inequitable conduct that harmed the debtor or other creditors. MCA funders who stacked advances, charged hidden fees, refused genuine reconciliation requests, or escalated collection during a period of disclosed hardship have faced subordination arguments.
This is not a standard remedy, and courts apply it carefully. But the factual record in many MCA relationships includes enough inequitable conduct to support the argument. A first call identifies whether that record exists in your situation and what to do with it.
