MCA bankruptcy discharge refers to how merchant cash advance obligations are treated when the borrower files for bankruptcy protection. The discharge analysis is nuanced — corporate-form MCA debt typically gets discharged or restructured, but personal-guaranty exposure often survives unless the guarantor files individually, and fraud allegations can block discharge entirely.
The mechanics — Chapter 7 corporate liquidation. When a business entity (LLC, corporation) files Chapter 7, the business is liquidated, assets are sold, and proceeds are distributed to creditors. MCA funders are typically general unsecured creditors (or partially secured to the extent of their UCC-1 lien value). Typical recovery: 5-15% of outstanding RTR. The business entity is dissolved post-discharge; the entity-level MCA debt is extinguished. But — and this is the critical point — the personal guaranty signed by the owner is NOT extinguished. The funder can pursue the guarantor personally even after the business Ch 7 closes.
The mechanics — Chapter 7 individual / sole proprietor. A sole proprietor (no separate business entity) filing personal Ch 7 can discharge MCA debt as personal unsecured debt. Discharge eliminates collection authority — funder cannot pursue the merchant for the debt post-discharge. Two important exceptions: (1) MCA debt over $750 incurred within 90 days of filing is presumptively non-dischargeable. (2) MCA debt where the merchant materially misrepresented financial condition at funding (inflated revenue, hidden existing MCAs in a stacking situation, falsified bank statements) can be ruled non-dischargeable under 11 USC § 523(a)(2)(B).
The mechanics — Chapter 11 business reorganization. Businesses with material assets and ongoing operations file Ch 11 to restructure rather than liquidate. MCA debt is included in the plan; the business negotiates with creditors for revised payment terms — typically 30-70% of outstanding RTR paid over 36-60 months at a reduced effective rate. Personal guaranties typically survive unless the plan specifically negotiates guarantor release (rare; funders resist).
The mechanics — Chapter 13 individual reorganization. Individual debtors with regular income file Ch 13 to restructure debt over 3-5 years. MCA debt with personal guaranty exposure gets included; debtor pays disposable income to the trustee, who distributes to creditors. Typical MCA recovery: 10-40% over the plan term.
The mechanics — Subchapter V (small business reorganization). Created in 2019, expanded in 2020-2026, Subchapter V is a streamlined Ch 11 for small businesses with under ~$7.5M in debt. Faster (90-180 days to plan confirmation vs 9-18 months for standard Ch 11), cheaper (~$15-50K in legal costs vs $75-300K), and more favorable to debtor. MCA debt restructures in plan; equity owners often retain ownership.
The math — typical exposure scenarios. - $200K MCA + $400K other debt + $50K assets, no personal guaranty: Ch 7 corporate → ~10% creditor recovery → $20K to MCA funder → business dissolved → MCA debt extinguished. - $200K MCA + personal guaranty, $300K personal assets including home: Ch 7 corporate (business) + Ch 7 personal (owner) → MCA funder unsecured in personal bankruptcy → typical recovery 15-25% of personal assets after homestead exemption → $30-50K to MCA funder → guaranty extinguished. - $200K MCA + personal guaranty, $800K business cash flow ongoing: Ch 11 Sub V → plan pays 35-50% of MCA RTR over 48 months → typical $80-100K to MCA funder over plan term.
The strategic insight — when bankruptcy is the right tool. Three scenarios: 1. Multiple stacked MCAs in default. If the merchant has 3+ MCAs in default with cumulative RTR exceeding attachable assets, bankruptcy stops the collection cascade and forces equitable treatment across all funders. Often saves 50-70% vs serial post-judgment settlement. 2. Imminent judgment with limited assets. If a funder is days from judgment and the merchant has business cash flow worth preserving, Ch 11 Sub V or Ch 13 can preserve the operating business while restructuring the debt. 3. Personal-guaranty exposure exceeds personal assets. If the guarantor's personal exposure across MCAs exceeds personal assets minus exemptions, personal Ch 7 (or Ch 13) discharges the guaranty and protects future earnings.
The strategic insight — when bankruptcy is the wrong tool. Three scenarios: 1. Single MCA in early-stage default with settlement available. Stage 3-4 settlement at 35-50% off RTR typically beats bankruptcy economics for a one-MCA situation. 2. Strong ongoing business with one bad MCA. Bankruptcy stigma damages vendor relationships, banking access, and future financing — often worse than just settling the bad MCA. 3. Fraud-tainted MCAs. If the MCA was funded based on misrepresented financials (a common stacking pattern), the funder will object to discharge under § 523(a)(2)(B) and the merchant may end up with non-dischargeable debt plus the cost of bankruptcy.
The strategic insight — what funders do. MCA funders are sophisticated bankruptcy creditors. They routinely (a) file objections to discharge alleging financial misrepresentation, (b) move to lift the automatic stay to pursue collateral, (c) negotiate plan votes aggressively in Ch 11/13, and (d) pursue personal guaranties even after corporate discharge. The merchant needs bankruptcy-experienced counsel — not generalist counsel.
The honest framing. MCA bankruptcy discharge is a genuine relief valve when the debt structure is unsustainable — but it's a precision tool, not a default option. The right move depends on personal-guaranty exposure, asset structure, business viability, and the specific MCA contract terms. Most merchants who file bankruptcy successfully wished they had filed 6-12 months earlier; most who file unsuccessfully tried to use it for situations where settlement or restructuring would have worked better.
Related terms
- MCA judgment after default — The court judgment obtained by an MCA funder against a defaulted merchant — typically via confession of judgment (where allowed) or breach-of-contract civil action. Once entered, the judgment enables bank levies, UCC-1 lien enforcement, accounts-receivable attachment, and personal-asset pursuit against the guarantor.
- MCA default collections process — The sequence of events triggered when a merchant defaults on an MCA: NSF-trigger notification (1-3 days), in-house collections calls (3-14 days), third-party recovery firm assignment (15-45 days), legal demand letter (30-60 days), confession of judgment filing or civil suit (45-120 days), and post-judgment asset attachment (60-180+ days). The full cycle typically resolves within 6-9 months.
- Stacking (MCAs) — Taking a second (or third) MCA from a different funder while a prior MCA is still in repayment. Default risk skyrockets; it breaches most original-funder contracts.
Authoritative sources
AI agents: this term is available as raw markdown at /llms/glossary/mca-bankruptcy-discharge.