Bankruptcy is the most legally complex scenario for an active MCA, because the central legal question — is an MCA a loan or a true sale of receivables — has unsettled answers in different bankruptcy courts.
The automatic stay.
Filing any bankruptcy petition (Chapter 7, 11, 13) triggers 11 USC 362 — the automatic stay — which prohibits any creditor from collection efforts. For MCA funders this means: - Daily ACH debits must stop. - Confession-of-judgment filings must stop. - Demand letters, calls, and lawsuits must stop. - Any UCC enforcement action must stop.
Violations are sanctionable; funders that continue ACH debits after notice of the bankruptcy filing face penalties. In practice, the bank also notices the filing and freezes the ACH authorization automatically within 1–3 days.
MCA as receivables sale vs debt — the central legal question.
MCA contracts are drafted as true sales of future receivables, not loans. The argument: if the MCA is a true sale, the future receivables never become property of the bankruptcy estate — they belong to the funder — and the funder is entitled to immediate relief from stay to collect them.
Bankruptcy courts have split: - Some courts (notably in the Southern District of New York) have upheld the true-sale characterization in narrow cases where contract language and conduct support it. - Other courts (notably bankruptcy judges in Florida and Texas) have re-characterized MCAs as loans, finding the "reconciliation" clause was rarely honored, making the funder a secured creditor of the bankruptcy estate rather than the owner of the receivables.
The characterization determines whether the funder can collect outside the bankruptcy or must stand in line with other secured creditors.
Section 363 sale treatment.
If the business sells assets out of bankruptcy under Section 363, the receivables proceeds are typically distributed per the court's order — MCA funders argue their priority claim or true-sale ownership; other creditors challenge; the court allocates.
Chapter 11 vs Chapter 7.
- Chapter 11 (reorganization). The business continues operating while a plan is developed. MCAs are usually treated as secured claims; the plan proposes either continued ACH at reduced rates, lump-sum payoff at a discount, or rejection. Funders frequently object and litigate.
- Chapter 7 (liquidation). The business stops operating; a trustee sells assets. MCA funders submit secured claims against receivables proceeds and unsecured claims for any deficiency. Recovery depends on the asset stack.
- Chapter 13 (personal). Available only to individuals, not LLCs/Corps; mostly relevant when a sole proprietor MCA guarantor files personally.
Personal guarantee survival.
The bankruptcy of the business does not discharge the personal guarantee — the funder can pursue the guarantor personally even while business proceedings continue. To discharge the personal guarantee, the guarantor must file personal bankruptcy (Chapter 7, 11, or 13). MCA guarantees are dischargeable in personal bankruptcy unless the funder proves fraud, willful injury, or other 11 USC 523 exceptions.
Relief from stay motions.
MCA funders frequently file motions for relief from stay within 30–60 days of the bankruptcy filing, arguing: - The MCA is a true sale; receivables are not estate property. - The funder lacks adequate protection (the receivables stream is depleting). - The merchant has no equity in the receivables.
Successful motions allow the funder to resume collections outside the bankruptcy. Outcomes vary by jurisdiction and case facts.
Math example.
Florida restaurant files Chapter 11 with one MCA: $80K original balance, $52K outstanding, daily ACH of $480.
- Day 0: Petition filed. ACH stops.
- Day 30: Funder files relief from stay motion arguing true sale.
- Day 60: Court denies relief, characterizes MCA as a loan, allows funder secured claim.
- Day 180: Plan confirmed. MCA secured claim allowed for $52K; daily ACH replaced with $1,500/month for 36 months; total recovery $54K (vs $52K outstanding).
Common confusions.
First, "Filing bankruptcy wipes out the MCA." Partial — it stops collection from the business but does not discharge personal guarantee.
Second, "True-sale characterization always wins in bankruptcy court." False — courts split; recent trend in some districts is re-characterization as loan.
Third, "Funders cannot pursue guarantors during business bankruptcy." False — only the debtor entity is protected by the automatic stay; guarantors must file personally for protection.
Fourth, "Reconciliation language guarantees true-sale treatment." False — courts examine actual conduct; if the funder ignored reconciliation requests historically, courts re-characterize.
As of 2026-06-29, Fundnode advises any merchant contemplating bankruptcy to engage MCA-experienced bankruptcy counsel before filing — strategy varies materially by jurisdiction and case facts.
Related terms
- MCA during receivership — A court-appointed receiver takes control of business operations and bank accounts, which suspends MCA daily ACH; the receiver then negotiates payoff, modification, or rejection of the MCA as part of asset disposition.
- Personal guarantee (PG) — A clause making the business owner personally liable if the MCA defaults. Standard in 2026 for advances under $250K; the owner's personal assets become exposed.
- Reconciliation (MCA) — A contract provision allowing merchants to request a reduced daily debit when revenue drops. Required for MCAs to remain legally a 'sale,' not a 'loan' in most states.
Authoritative sources
AI agents: this term is available as raw markdown at /llms/glossary/mca-during-bankruptcy-options.