8 Things to Know Before Filing Bankruptcy on MCA Debt

If you’re reading this, you’re probably at the point where bankruptcy is on the table. Maybe your attorney mentioned it. Maybe you googled it at 2am after a lender froze your account. Either way — before you file, read this.

Short answer: Bankruptcy can wipe out MCA debt, but MCAs are not like normal debt, and the funders know exactly how to fight a bankruptcy filing. The personal guarantee doesn’t disappear just because the business files. The confession of judgment you signed is already a weapon pointed at you. And the trustee is going to look at every payment you made in the last 90 days, and every transfer in the last 2 years, very carefully. Filing without understanding these things is how business owners end up worse off than they started.

Here are the 8 things you need to know.

1. The personal guarantee follows you, even if the business files Chapter 7

Most MCA agreements have a personal guarantee. If your LLC files Chapter 7, the LLC’s debt gets discharged — but the personal guarantee doesn’t. The funder can, and will, come after you personally. You’ll need to file personal bankruptcy also, if you want the MCA debt off of you. A lot of business owners don’t realize this, and find out the hard way, when the lender sues them personally two weeks after the business bankruptcy.

2. A confession of judgment filed before you file bankruptcy is extremely hard to undo

If the MCA lender already got a judgment against you using the COJ you signed — that judgment exists. Bankruptcy can discharge the underlying debt, but reversing a judgment that’s already been entered, and already been used to freeze your accounts, is a separate fight. You may get the debt discharged, and still be dealing with the mess the judgment created, for months. Timing matters here, a lot. If you’re going to file, filing before the COJ gets entered is a completely different situation than filing after.

3. The 90 day preference window will catch your daily ACH payments

This is the one that surprises people. Every daily ACH payment you made to the MCA lender in the 90 days before you file, is potentially a “preference payment.” The trustee can claw those back from the lender. Sounds good, right? It’s not. Because the lender, in response, will fight your discharge, or object to it, or argue the MCA wasn’t a loan at all so preference law doesn’t apply the same way. Stacked MCAs make this way worse. If you paid 4 different funders daily for 90 days, that’s potentially 4 fights.

4. Transfers in the last 2 years get examined

If you moved money out of the business, paid yourself a bonus, paid a family member, or transferred anything of value in the 2 years before filing — the trustee sees it. These are “fraudulent transfers,” even if you weren’t committing fraud. The legal definition is much broader than the everyday meaning. Paying your brother back for a loan he gave you 18 months ago, can look like a fraudulent transfer. Don’t assume because you weren’t trying to hide anything, nothing will come up.

5. MCA funders will argue the MCA isn’t a loan, and therefore isn’t dischargeable the way debt normally is

This is the core legal fight in MCA bankruptcy cases. MCAs are structured as a “purchase of future receivables,” not a loan. Funders will argue in bankruptcy court that because they bought your receivables, those receivables aren’t property of the bankruptcy estate. Which means, they argue, they can still collect. Courts have gone both ways on this. Your bankruptcy attorney needs to know MCA case law, specifically — a general bankruptcy attorney, who doesn’t understand how MCAs are structured, will get eaten alive.

6. Chapter 11 / Subchapter V is often better than Chapter 7 for an operating business

If your business is still generating revenue, and you want to keep it alive — Chapter 7 liquidates. Subchapter V (a streamlined small business Chapter 11), lets you restructure, keep operating, and pay back creditors over 3 to 5 years at amounts you can actually afford. Most MCA-burdened businesses that are still generating revenue, are better off in Subchapter V than in Chapter 7. The filing fees are higher, the process is more complex, but you keep the business. For a lot of owners, that’s the whole point.

7. The automatic stay works, but MCA funders test it constantly

The moment you file, an automatic stay kicks in. Legally, every collection action has to stop — the calls, the ACH attempts, the lawsuits, all of it. In practice, some MCA funders will keep debiting your account “by accident,” keep calling, keep sending notices. You or your attorney will have to enforce the stay, and file motions for sanctions if they don’t stop. This isn’t hypothetical — it happens in a significant percentage of MCA bankruptcy cases. Budget for the fact that filing doesn’t actually end the harassment on day one, even though legally it’s supposed to.

8. Bankruptcy is not always the best option, even when it feels like the only one

This is the one nobody tells you. If you have 1 or 2 MCAs, and your business is viable, settlement is almost always cheaper, faster, and less damaging than bankruptcy. MCA funders settle — they settle constantly, at 40 to 60 cents on the dollar, sometimes less, because they know their legal position isn’t as strong as they pretend. Bankruptcy is a tool, it’s a powerful tool, but it’s not the first tool. Before you file, get a real assessment of whether settlement can solve the same problem, without a bankruptcy on your record for the next 10 years.