MCA bankruptcy discharge — the detailed merchant guide.

The 60-second answer

MCA balances are generally treated as unsecured business debt in bankruptcy. Through Chapter 7 (liquidation), the business or the personal guarantor can discharge unsecured debts including MCAs — with the trade-off that non-exempt assets are liquidated. Through Chapter 11 or its small-business cousin Subchapter V, the business stays operating and unsecured MCA claims are paid pennies on the dollar over 3–5 years per a court-approved plan. Chapter 13 is a personal-reorganization tool that can handle the personal guarantee on the MCA but is rarely used for the business debt itself.

The catch — and it's a big one — is that nearly every MCA includes a personal guarantee from the owner. Filing business bankruptcy without also addressing the personal guarantee leaves the owner personally on the hook. So the question is rarely "should I file Chapter 7 for my business," it's "what combination of business and personal bankruptcy actually solves my problem."

How MCA debt gets categorized in bankruptcy

The first question in any MCA bankruptcy is characterization: is this a loan (and thus a dischargeable debt), or is it the funder's already-purchased property (and thus potentially not discharge-able as a "debt" at all)?

Courts have come out both ways, but the strong majority position treats the unpaid MCA balance as a general unsecured claim. The funder files a proof of claim for the remaining payback amount, joins the queue with other unsecured creditors, and accepts whatever cents-on-the-dollar payment the plan provides — or, in Chapter 7, accepts the discharge.

The characterization argument matters mostly when the funder wants to argue something specific — for example, that ACH debits taken within 90 days pre-filing were preferential transfers (and thus recoverable into the bankruptcy estate). Some funders argue the debits weren't "transfers of the debtor's property" because the receivables already belonged to them. Mixed case law, depends on jurisdiction.

Chapter 7 — the clean liquidation

Chapter 7 is the fastest, cheapest path. The trustee gathers and sells non-exempt assets, distributes proceeds to creditors, and discharges remaining unsecured debt. For an individual, this happens in 4–6 months. For a business entity, the entity itself doesn't get a "discharge" — it's wound down — but the unsecured creditors are paid pro rata from asset sales and the business ceases to exist.

Personal Chapter 7 for the MCA guarantor

This is the more common move. The business may continue operating (or wind down informally) while the owner-guarantor files personal Chapter 7 to discharge the personal guarantee on the MCA. Mechanics:

• Means test. You must pass the Chapter 7 means test — household income below median for your state, or after deductions a low enough disposable income to qualify.
• Exempt assets. Federal or state exemptions protect a primary residence (up to a homestead cap), retirement accounts, basic personal property, and a modest vehicle. Everything above exemption is sold by the trustee.
• Discharge timing. 4–6 months from filing. Discharges all unsecured debt including the MCA personal guarantee.
• Credit impact. Stays on personal credit reports for 10 years.
• Cost: $338 filing fee + $1,500–$4,000 attorney fees.

Business Chapter 7 (entity liquidation)

The LLC or corporation files Chapter 7 and ceases operations. Assets sold, creditors paid in priority order, remaining unsecured debt simply uncollectible from the entity (because the entity no longer exists). MCA balance goes uncollected from the business — but the personal guarantor remains liable unless they also file personally.

Chapter 11 and Subchapter V — keep operating while restructuring

Chapter 11 is the traditional business-reorganization tool. The debtor stays in possession of the business, continues operating, and proposes a plan of reorganization that restructures debt. Creditors vote on the plan; the court confirms it if it meets statutory requirements.

Why Subchapter V is the right tool for most MCA bankruptcies

Subchapter V is a streamlined Chapter 11 for small businesses, created in 2019. For merchants carrying multiple MCAs, it's usually the right vehicle:

• Debt cap: ~$3.024M total debt (as of 2026; adjusted periodically by the BAPCPA inflation index).
• Speed: Plan must be filed within 90 days. Confirmation typically in 3–6 months total.
• No creditor vote required. Court can confirm a plan over creditor objection if it meets statutory tests. Removes the unanimous-creditor-consent problem that kills traditional Chapter 11s.
• Owner equity preserved. Unlike full Chapter 11, the owner can keep equity in the reorganized business without paying creditors in full.
• Plan payments: Typically 3–5 years of payments from projected disposable income. Unsecured MCAs often paid 5–30 cents on the dollar.
• Cost: $25,000–$75,000 in attorney and professional fees over the case life. Significantly cheaper than full Chapter 11.

Worked example: stacked MCAs in Subchapter V

A Texas restaurant carries three stacked MCAs totaling $410,000 in remaining payback. Monthly revenue $95,000. Daily ACH outflow to MCAs is $7,800, eating ~$170,000 of annual revenue. The business cannot service the debt and pay rent, payroll, and food cost simultaneously.

Sub-V plan:

• Restaurant continues operating through Sub-V, retaining equity.
• MCA daily ACH stops on filing (automatic stay).
• Plan proposes $2,800/month for 60 months to all unsecured creditors pro rata, totaling $168,000 of distributable disposable income.
• MCA claims (combined $410,000) get ~41 cents on the dollar.
• Owner equity preserved. Personal guarantees on the MCAs are extinguished as to the discharged debt (with caveats — see below).
• Total cost: ~$55,000 in attorney/professional fees, paid over the plan period.

Net effect: $242,000 of MCA debt discharged, business survives, daily cash flow recovers, owner avoids personal Chapter 7. This is the textbook Sub-V outcome — and it's why Sub-V usage in MCA cases has grown sharply since 2020.

Chapter 13 — the personal reorganization

Chapter 13 is a personal-bankruptcy reorganization tool: you keep all your assets and pay creditors over 3–5 years from your disposable income. Often used for the personal guarantee on an MCA when the merchant doesn't qualify for Chapter 7 (income too high) or wants to protect home equity above the exemption.

• Debt limits: Unsecured debt under ~$465K, secured debt under ~$1.4M (2026 figures).
• Plan duration: 3 years if below-median income, 5 years if above-median.
• Unsecured creditors (including MCA personal guarantees) paid from disposable income — often 5–25 cents on the dollar.
• Stays on personal credit for 7 years.
• Cost: $313 filing fee + $3,000–$6,000 attorney fees.

The personal guarantee trap

Almost every MCA agreement includes a personal guarantee from the business owner. This is the single most important fact to understand about MCA bankruptcy strategy.

Business bankruptcy (Chapter 7 entity liquidation or Chapter 11 business reorganization) discharges the business's debt. It does not discharge the personal guarantor's separate obligation. The funder simply turns to the guarantor and pursues them personally for the full balance.

The two paths that actually work:

• Subchapter V with guarantee channeling. The Sub-V plan can include provisions that channel personal guarantor claims into the plan's treatment. Not automatic, requires careful plan drafting, and depends on the jurisdiction.
• Coordinated dual filing. Business files Sub-V or Chapter 7; owner simultaneously files personal Chapter 7 or 13 to address the guarantee. More expensive, but cleanly extinguishes both layers of liability.

When the funder fights discharge — fraud and §523

The funder's strongest weapon in bankruptcy is filing an adversary proceeding under 11 U.S.C. §523, arguing the specific MCA debt is non-dischargeable because it was incurred through fraud. Common §523 arguments in MCA cases:

• §523(a)(2)(A) — fraudulent misrepresentation. Funder argues the merchant misrepresented revenue, intent to repay, or other material facts at funding.
• §523(a)(2)(B) — false written statement of financial condition. Funder argues the merchant submitted altered bank statements, falsified revenue figures, or otherwise lied in writing about financial condition.
• §523(a)(6) — willful and malicious injury. Funder argues the merchant intentionally diverted receivables or hid assets to defeat the funder's contractual rights to those receivables.

§523 adversary proceedings are expensive ($25,000–$100,000 to defend) and outcomes are highly fact-specific. Merchants who actually altered bank statements, lied about revenue, or applied for multiple MCAs simultaneously while concealing existing positions are at serious risk of non-dischargeability. Merchants who entered the MCA in good faith and simply ran out of cash are usually fine.

What pre-filing acts to avoid

Things that turn a routine MCA bankruptcy into an adversary-proceeding nightmare:

• Taking new MCAs in the 90 days before filing. Creates fraudulent transfer / preferential transfer issues and bad-faith inferences.
• Transferring business assets to family or related entities pre-filing. Voidable transfers; can trigger §727 denial of discharge entirely.
• Hiding cash, closing accounts, or moving funds to insiders. Same.
• Continuing to draw on the MCA while planning to file. Bad faith.
• Stiffing the funder while paying other creditors selectively. Preferential transfers; the trustee can claw back.

The cost-benefit framework

Bankruptcy is worth pursuing when:

• Total MCA debt exceeds 25% of annual revenue and is structurally unserviceable.
• Restructuring discussions with funders have failed or produced unworkable terms.
• COJ enforcement has started or is imminent.
• The personal guarantor has minimal personal assets at risk above exemption levels.
• The business is viable post-restructuring (Sub-V) or genuinely cannot continue (Chapter 7).

Bankruptcy is the wrong tool when:

• A single workout with the funder would solve the problem at lower cost and without credit damage.
• The merchant has substantial non-exempt assets they want to preserve.
• The business is too far gone for any reorganization plan to project repayable disposable income.
• The merchant has engaged in conduct that would expose them to §523 or §727 challenges.