Can I get an MCA during bankruptcy protection?

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Bankruptcy chapter context. (1) Chapter 7 — business liquidation; business operations cease, assets sold by trustee. New financing during active Chapter 7 is essentially impossible because the business itself is winding down. (2) Chapter 11 — business reorganization; business continues operating as 'debtor-in-possession' (DIP) while restructuring debts under court supervision. New financing is possible with court approval (called 'DIP financing'). (3) Chapter 13 — personal reorganization for sole proprietors and individual debtors; affects personal finances and any sole-proprietor business. New business credit limited and requires trustee approval. (4) Chapter 12 — farm/fishing operations; similar to Chapter 13 with court oversight on new debt.

Bankruptcy court approval requirements for new debt. (1) Chapter 11 DIP financing — requires court motion, notice to creditors, hearing, and court order approving the financing. Funder must be willing to participate in court process. (2) Bankruptcy court evaluates — necessity of financing for business continuation, terms (must be reasonable), priority of new lien (often super-priority), impact on existing creditors. (3) Hearing typically 14–30 days from motion filing; emergency interim orders possible for urgent needs. (4) Funder participation — most MCA funders not equipped for bankruptcy court process; specialty distressed-business lenders are. (5) Court order required before funding — funder cannot fund based on signed contract alone; court order is the operative authorization.

Why most MCA funders decline active bankruptcy applicants. (1) Bankruptcy stays — automatic stay under 11 USC 362 prevents collections without court relief, making MCA's daily-debit structure problematic. (2) Priority disputes — new MCA debt competes with existing creditors for repayment; complicates funder recovery in default scenarios. (3) Reputational risk — funders avoid being seen as predatory toward distressed businesses. (4) Underwriting can't price the risk — typical MCA underwriting models don't accommodate active bankruptcy variables. (5) State regulatory scrutiny — multiple state regulators monitor MCA practices toward distressed merchants. (6) Brand-name funders (Credibly, OnDeck, Greenbox, etc.) — universally decline active bankruptcy applicants.

Specialty distressed-business lenders. (1) Some specialty finance companies focus specifically on DIP financing or distressed business financing. (2) Examples (verify current activity in 2026) — Crystal Financial, Encina Business Credit, Gibraltar Business Capital, Siena Lending Group, others in the distressed-finance space. (3) Pricing premium — DIP financing typically 12–18% interest plus fees, vs traditional bridge lending 8–14%. (4) Collateral requirements — typically require strong asset coverage and may demand cross-collateralization. (5) Process — funder works with bankruptcy counsel on motion, court hearing, order. Timeline 30–60 days typical. (6) These are not traditional MCAs; they are court-approved DIP loans with monthly interest and balloon at exit from bankruptcy.

Why MCA structure is problematic in bankruptcy. (1) Daily debit structure conflicts with bankruptcy cash flow management — court typically wants visibility into all outflows. (2) Factor-rate pricing may be deemed unreasonable by court if APR-equivalent is high. (3) Personal guarantee may not be enforceable for debt incurred during bankruptcy. (4) MCA's 'purchase of receivables' structure may be recharacterized as loan in bankruptcy court, affecting priority and collection rights. (5) Most bankruptcy courts prefer traditional loan structures (interest rate, monthly payments) for DIP financing over MCAs.

Realistic options for distressed businesses considering MCA during bankruptcy. (1) Wait until bankruptcy resolves — Chapter 11 reorganization or discharge enables traditional funding access. Typical Chapter 11 timeline 6–18 months. (2) Specialty DIP lender — work with bankruptcy counsel to identify lenders willing to participate in court process. (3) Asset-based lending — secured lending against accounts receivable or inventory can work in some bankruptcy contexts. (4) Vendor financing — supplier credit extensions sometimes available with court approval. (5) Equity financing — capital raise from existing or new equity holders may be alternative path. (6) Internal cash management — work with bankruptcy counsel on operating budget that doesn't require new debt.

Post-bankruptcy MCA availability. (1) Chapter 7 discharge — business is liquidated; no future MCA for that entity (new business with same owner may eventually qualify). (2) Chapter 11 confirmed plan — business emerges from bankruptcy with discharged or restructured debt; MCA funders generally require 12–24 months post-confirmation before considering applications. (3) Chapter 13 discharge — affects sole proprietors; business MCA funders generally require 24–36 months post-discharge for re-eligibility. (4) Dismissed bankruptcy — case dismissed without discharge; treated similarly to active bankruptcy by funders for 12–24 months. (5) Each funder has specific post-bankruptcy criteria; some specialty funders accept earlier than mainstream funders.

Risks of misrepresenting bankruptcy status to MCA funders. (1) Most MCA applications require disclosure of active bankruptcy and bankruptcy history. (2) Funder may verify via PACER or commercial credit reports. (3) Misrepresentation can constitute fraud — potentially triggering bankruptcy fraud (federal crime) and MCA fraud (civil and potentially criminal). (4) Funded MCA based on false bankruptcy disclosure may be voided by court. (5) Personal guarantor may face fraud claims independent of business entity. (6) Always disclose bankruptcy honestly; specialty funders exist for distressed situations.

Working with bankruptcy counsel on financing. (1) Hire bankruptcy counsel familiar with DIP financing. (2) Counsel prepares court motion, manages creditor notice, represents at hearing. (3) Cost — bankruptcy counsel fees typically $300–600/hour; DIP financing motion may cost $5,000–25,000 in legal fees. (4) Court-approved fees — bankruptcy court typically approves reasonable counsel fees as administrative expense. (5) Specialty lender introductions — bankruptcy counsel often has relationships with DIP lenders. (6) Speed — emergency interim financing orders possible for urgent needs (utility payments, payroll); permanent financing orders take 30–60 days.

Court considerations in approving DIP financing. (1) Necessity — financing needed for business continuation and reorganization plan feasibility. (2) Adequate protection — existing creditors not harmed by new debt priority. (3) Reasonable terms — interest rate, fees, covenants must be reasonable for distressed-business context. (4) Lender good faith — court evaluates lender's terms for predatory characteristics. (5) Alternative analysis — court evaluates whether better terms available from other lenders. (6) Hearing process — creditors can object; court rules after argument.

Bottom line: Active bankruptcy makes traditional MCA access essentially impossible in 2026. Chapter 11 debtors-in-possession can pursue DIP financing through bankruptcy court approval — typically structured as conventional loan with court-approved terms rather than MCA. Specialty distressed-business lenders exist (Crystal Financial, Encina, Gibraltar, Siena, others) for court-approved financing, but pricing is premium and process takes 30–60 days. Most mainstream MCA funders (Credibly, OnDeck, Greenbox, etc.) decline active bankruptcy applicants universally. If your business is in active bankruptcy and needs capital, work with bankruptcy counsel on DIP financing motion, not an MCA application. Post-bankruptcy MCA availability typically requires 12–24 months post-confirmation/discharge before mainstream funders will consider applications. Never misrepresent bankruptcy status on MCA application — fraud consequences are severe.

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