Can You File Bankruptcy on a Merchant Cash Advance?

Short answer: yes, you can file bankruptcy on a merchant cash advance, and the automatic stay will stop MCA collection activity the moment you file – the calls, the lawsuits, the UCC enforcement, the frozen accounts, all of it freezes the second the petition hits the court's docket. But "yes you can file" is not the same as "yes it'll work the way you think it will," and MCA's are one of the hardest debts in bankruptcy because of how the contracts are structured. If you're considering this as a way to get out of your MCA, you need to understand what actually happens, because the answer is complicated, more so than any other type of business debt.

Let me walk you through it.

Is an MCA Dischargeable in Bankruptcy?

This is the question everyone asks first, and the honest answer is: usually yes, but not always, and the funder is going to fight you on it. As any lender who has given immense amounts of money will tell you, they want their money back. Most MCA lenders are borderline loan sharks, and that’s how they conduct business too. They will fight tooth and nail. It’s just the bottom line.

In a normal Chapter 7, unsecured business debts get discharged. Credit cards, vendor debts, business loans, lines of credit – all wiped out, assuming there's no fraud and you qualify for Chapter 7 in the first place. The default assumption many people have when they’re considering bankruptcy is that MCA debt falls into the same bucket and gets discharged the same way. And in most cases, that's exactly what happens – but not always.

But MCA contracts are not loans, even though many people call them loans; including the lenders. That's the entire trick of the industry – the contract is written as a purchase of future receivables, not a loan, which is how MCA companies avoid state usury laws that would otherwise cap their effective interest rates at 16% to 25% instead of the 80% to 200% they actually charge. And that same trick is what they use in bankruptcy court to argue your case shouldn't go the way you want it to go.

The funder's argument goes like this: "We didn't lend this business money. We bought their future receivables. Those receivables aren't property of the bankruptcy estate, because we already own them. The automatic stay doesn't apply to our property, and the discharge doesn't wipe out our right to collect them, because there's no debt to discharge – there's an asset that belongs to us." If the bankruptcy judge buys this argument, the MCA funder can keep collecting receivables right through the bankruptcy, which defeats the whole point of filing for bankruptcy in the first place.

Whether the judge buys it depends on the contract, the facts, and the jurisdiction. Some courts have ruled the "true sale" structure is real and the funder wins. Other courts have looked at the same kind of contract and ruled it's a loan dressed up as a sale, and the funder loses. The case law is genuinely split, and it's evolving fast. New York courts in particular have been more willing to look past the contract language and treat MCA's as loans when the facts support it.

So the dischargeability question is: probably yes, but the funder is going to make you fight for it.

What Happens to MCA Lawsuits When You File Bankruptcy?

The moment you file – Chapter 7, Chapter 11, Chapter 13, doesn't matter – the automatic stay kicks in under 11 U.S.C. § 362. Every lawsuit pending stops. Every collection effort stops. The MCA funder cannot take any action to collect the debt without first getting permission from the bankruptcy court.

This is the part of bankruptcy that actually helps in the short term. If you've been served, if there's a judgment about to enter, if your accounts are about to be frozen – filing stops it cold. The funder's lawyers will get notice within days, the lawsuits will go on hold, and you'll get breathing room for the first time in weeks or months.

The breathing room is real. But it's not permanent, because the funder will file a motion for relief from stay almost immediately, arguing exactly what I described above – that the receivables aren't property of the estate, that they have a right to continue collecting, that the stay shouldn't protect you. These motions are heard fast, usually within 30 to 45 days, and the outcome depends on how your contract is written and which judge you draw.

If you win the motion, the MCA debt gets treated like any other unsecured debt, and you proceed to discharge. If you lose, the funder can resume collection on the receivables they "bought.”

Chapter 7 vs Chapter 11 vs Chapter 13 for MCA Debt

This is where it matters which chapter you're filing under, because the strategy is completely different.

Chapter 7

Chapter 7 is liquidation. You file, a trustee is appointed, your non-exempt assets are sold to pay creditors, and at the end of the case (usually 4 to 6 months), your remaining unsecured debts are discharged. For an individual, Chapter 7 is the cleanest way to get rid of MCA debt – assuming you qualify under the means test, and assuming the funder doesn't successfully argue the receivables aren't dischargeable.

The catch with Chapter 7 is that it's designed to wind the business down, not save it. If you're personally liable on the MCA's (which you almost certainly are, because you signed a personal guarantee), Chapter 7 wipes out your personal liability. But the business itself, if it's an LLC or a corporation, doesn't really get a "discharge" – it just gets liquidated. If your goal is to save the business, Chapter 7 is the wrong tool.

Chapter 11

Chapter 11 is reorganization, and it's the right tool if you have a viable business that's been crushed by MCA payments and you want to keep operating. You file, you propose a plan to restructure your debts, your creditors vote on it, and the court either confirms the plan or doesn't. If it's confirmed, you pay the restructured debts over time (typically 3 to 5 years) and the rest gets discharged.

Chapter 11 used to be too expensive for most small businesses – filing fees, legal fees, US Trustee fees, the whole apparatus was built for companies with tens of millions in debt. Subchapter V, added in 2019, changed that. Subchapter V is a streamlined Chapter 11 for small businesses with under about $7.5 million in debt (the exact number changes – check the current limit), and it's faster, cheaper, and gives the debtor more control. For a business owner with two or three MCA's eating the company alive, Subchapter V is often the right move. It's the chapter that's actually designed for your situation.

The downside: Chapter 11, even Subchapter V, is still expensive. You're looking at $25,000 to $75,000 in legal fees minimum, plus filing fees, plus ongoing reporting requirements. If the business doesn't have the cash flow to support those costs and the restructured payments, the case will fail and you'll end up in Chapter 7 anyway.

Chapter 13

Chapter 13 is a personal reorganization for individuals with regular income. It's not really designed for business debt – it's the chapter people use for mortgages, car loans, and personal credit cards – but if your MCA exposure is primarily personal because of the guarantee, and you have W-2 or self-employment income to fund a plan, Chapter 13 can work. You propose a 3 or 5 year plan to repay creditors a portion of what you owe, and the rest gets discharged at the end.

Chapter 13 has debt limits that may exclude you if your MCA exposure is large. The limits get adjusted periodically, so check the current numbers, but as of recent updates the combined secured and unsecured debt limit is in the low millions. If you're past it, Chapter 13 isn't an option and you're looking at Chapter 11 or Chapter 7.

Will the MCA Funder Sue Me Personally if I File Business Bankruptcy?

Yes – if you signed a personal guarantee, which you almost certainly did. Every MCA contract I've ever seen includes a personal guarantee from the owner, sometimes from multiple owners, and sometimes from spouses. The personal guarantee is what gives the funder the right to come after your personal assets if the business can't pay.

When the business files bankruptcy, the personal guarantee is not automatically affected. The business is the debtor in the bankruptcy case, not you personally. The funder can still sue you on the personal guarantee, and the automatic stay doesn't protect you – it only protects the entity that filed.

This is why business owners in this situation usually have to file two bankruptcies, or one personal bankruptcy that covers both the business and personal exposure. If you're an individual sole proprietor, your personal Chapter 7 covers everything. If your business is an LLC or corporation, you may need to file the business in Chapter 7 or 11 and file personally in Chapter 7 or 13 to wipe out the guarantee. This is a strategic decision that has to be made with a lawyer who understands how the two cases interact.

Can MCA Funders Object to My Discharge?

Yes, and they sometimes do, particularly if there's any hint of fraud in the original application. This is where the bankruptcy filing creates a separate problem on top of the dischargeability question.

Under 11 U.S.C. § 523(a)(2), debts incurred through fraud are not dischargeable. If the MCA funder can show that you submitted false bank statements, misstated revenue, or otherwise lied to get the funding, they can file an adversary proceeding inside the bankruptcy case asking the court to declare that specific debt non-dischargeable. If they win, you go through the entire bankruptcy, get a discharge on everything else, and still owe the MCA in full.

This is the point where I have to repeat what I said in the criminal liability article: if your application wasn't clean, bankruptcy is not a safe harbor. The funder will pull the application file, compare it to your actual bank records, and if they find a discrepancy, they'll file the adversary. Some of them file these aggressively because they know the threat alone will push debtors into a settlement. Others only file when the discrepancy is obvious. Either way, you need to know going in whether your application is going to survive scrutiny – because the bankruptcy filing is what triggers the scrutiny.

What You Should Do Next

If you're considering bankruptcy because of MCA debt, talk to two people before you decide anything: a bankruptcy attorney who actually handles MCA cases (not all of them do), and a debt settlement firm that handles MCA work. The reason to talk to both is that they'll give you different information about the same situation, and you need both view points to make a real decision. The bankruptcy lawyer will tell you what filing looks like. The settlement firm will tell you what avoiding it looks like. The right answer is whichever one costs you less – in money, in time, and in collateral damage to the rest of your life.