Bankruptcy Changes the Entire Calculation
Filing for bankruptcy does not erase MCA debt automatically, but it does something nearly as significant: it stops the bleeding. The moment a petition lands in federal court, an automatic stay takes effect under 11 U.S.C. § 362, halting every ACH withdrawal, every collection call, every threatened lawsuit, and every asset seizure your funder had been preparing. What felt like a freefall becomes, at minimum, a controlled descent.
This is what business owners facing MCA obligations tend to discover too late. The stay is not a solution. It is a pause that creates space for one.
The True Sale Question Determines Everything
Whether your MCA agreement can be discharged in bankruptcy depends almost entirely on how the court characterizes it. Funders structure these agreements as purchases of future receivables, not loans, and the distinction matters enormously. A true purchase of receivables survives bankruptcy in a different form than a disguised loan. The loan gets discharged. The purchase, in theory, does not.
Courts have grown skeptical of this framing. In In re Bridger Steele, Inc., decided in the Montana Bankruptcy Court in September 2024, the court scrutinized whether the funder bore genuine risk of merchant nonpayment or whether the repayment obligation was effectively absolute. An agreement with no reconciliation mechanism, no adjustment for actual revenue, and no genuine exposure to merchant insolvency looks less like a receivables purchase and more like a loan wearing different clothes.
The three-factor test applied by New York courts asks whether a reconciliation provision exists and functions genuinely, whether the agreement imposes a fixed repayment term, and whether the funder retains recourse against the merchant in bankruptcy. Satisfy all three, and the MCA begins to look like a loan.
Chapter 7 Offers the Clean Break — With Conditions
For a business that cannot be saved and has no meaningful assets to protect, Chapter 7 provides something resembling resolution. The business entity is dissolved, its assets liquidated, and its debts discharged. If the court recharacterizes the MCA as a loan, that obligation disappears with the rest.
The complication arrives in the form of personal guarantees. Most MCA agreements require the business owner to sign individually, and that signature follows the person out of bankruptcy. Chapter 7 for the business does not extinguish a personal guarantee unless the individual files separately. Business owners who believe they have exited cleanly sometimes discover, months later, that a judgment has been entered against them personally.
Chapter 11 Keeps the Business Alive
When the business has value worth preserving, Chapter 11 provides a reorganization path. The MCA obligation gets treated as a general unsecured claim — or potentially as a secured claim, depending on the UCC filing and whether a blanket lien covers identifiable assets. Under a confirmed reorganization plan, the funder may receive cents on the dollar over an extended period rather than the aggressive daily withdrawal the contract contemplated.
There is also the matter of equitable subordination under 11 U.S.C. § 510(c). Courts have applied this doctrine to MCA funders whose conduct before bankruptcy crossed from aggressive into inequitable. Predatory stacking, deliberate obscuring of effective rates, and retaliatory escalation during hardship have all served as the factual predicates for subordination arguments.
Avoidable Transfers Are a Real Weapon
In the period before filing, if the business made payments to an MCA funder while insolvent and while other creditors received nothing, a bankruptcy trustee may seek to recover those payments as preferential transfers under 11 U.S.C. § 547. The preference period for non-insiders is ninety days. The funder received value from a struggling business in the period immediately preceding collapse, and the trustee can argue those payments should be returned to the estate for equitable distribution.
The Western District of North Carolina’s 2025 decision in Martinez Quality Painting v. Newco examined precisely this theory, treating MCA payments made in the preference period as avoidable transfers. The implication for funders is significant. The implication for debtors is that the money is not necessarily gone.
The Personal Guarantee Problem
One quiet fact about MCA agreements is that the personal guarantee provision receives almost no attention during origination, when the business owner is focused on whether they qualify and how quickly funds will arrive. The guarantee surfaces later, when everything else has failed. At that point, the business may be dissolving in Chapter 7 while the individual stands exposed to a separate action on the guarantee.
Filing a personal Chapter 7 alongside the business bankruptcy is one approach, though it requires passing the means test and accepting the consequences for personal credit and assets. Some clients find this acceptable. Others find the personal filing more frightening than the business debt itself. That calculus is genuinely individual and there is no universal answer.
Attorney General Enforcement Has Changed the Pressure Points
On January 22, 2025, New York Attorney General Letitia James announced a settlement exceeding one billion dollars against Yellowstone Capital and its affiliated entities, following a 289-page complaint filed in March 2024. The significance for bankruptcy practice is indirect but real. Funders operating under regulatory pressure are more willing to negotiate, more willing to accept reduced recoveries, and more attentive to whether their agreements contain provisions that could become liabilities in litigation.
When a funder’s own contract terms are the subject of an attorney general investigation, demanding that a debtor honor every fee and default provision requires a certain confidence in the enforceability of those provisions. That confidence has eroded.
What This Means Before You File
Bankruptcy is not the only option, and for many businesses it is not the first one. Negotiated settlements, forbearance agreements, and recharacterization demands sent through counsel can resolve MCA obligations without a court filing. The threat of a bankruptcy petition, credibly made, often produces results that the petition itself would take months to achieve.
But the option has to be real. Funders have seen the empty threat, and they have seen the client who hired a debt relief company that sent letters rather than counsel. The difference between a letter and a filed petition is the difference between a suggestion and a consequence.
Consultation is where this conversation begins, because the MCA agreement you signed almost certainly contains provisions that are more vulnerable than the funder wants you to know.
