Owners usually want to know if they can wipe out debt from a merchant cash advance in bankruptcy. Sometimes. Most merchant cash advance funders contractually describe a purchase of future receivables, not a loan. If it is truly a purchase, the funder owns the receivables, and there isn’t much to discharge. Increasingly, however, the bankruptcy courts look through the label, and if it was really a loan, you may be able to discharge or restructure it, and even recover amounts you have already paid. It depends on the details of your agreement. The whole MCA market was about $19.65 billion in 2025, and should reach $26.87 billion by 2030. They are popular among businesses who don’t qualify for bank financing. And they are starting to be looked at with suspicion.
How does an MCA work, exactly? The funder advances money now, in exchange for a portion of the business’s future credit card sales or accounts receivable, purchased at a discount. It gets paid back by having small chunks of cash automatically removed from the business’s bank account on a daily or weekly basis. If they advance $90,000 now, for example, and are buying $140,000 of the business’s future receivables, they may then daily debit $4,000 from the account until they get that $140,000 back. (The difference, $50,000, is what the funder has really earned.) In some cases, the effective annual rate can be in the 300%+ range, so this is not a cheap form of credit.
Three Key Factors
The law cares only about substance, not the name you attach to it. The courts will look beyond the “document title” and find out what is really going on. For instance, a pure sale of receivables will expose the buyer to the risk of nonpayment: if the receivable doesn’t get collected, the buyer loses. But if the funder has an absolute right to collect its advance, there is no risk, which means it’s a loan regardless of what the paperwork says. Three key factors are whether there is a reconciliation clause, the deal has a set end date, and the funder gets its advance back even if the business files bankruptcy. Keep in mind, though, that these three factors are not the only factors a court may consider.
A reconciliation happens when the funder reviews the actual sales of a merchant compared to estimated sales. If the actual sales are less, the funder reduces the daily deduction. One red flag is a reconciliation clause that doesn’t require the funder to repay any of the funds it receives above the agreed percentage of your revenue. You might also see a reconciliation clause that suspends reconciliation while the merchant is in default, with “default” defined as a missed payment or breach of another covenant (say, a solvency covenant). Another sign is that the agreement doesn’t have a maturity date, but you can easily figure out how long the term is by dividing the balance owed by the daily payment. Other red flags include a personal guarantee or a security interest in the business assets. Look at the contract and you won’t see it say which receivables were purchased, nor will there be any cap on how the merchant uses the proceeds as long as they make their payments. Courts have called that last feature “a significant indicator of a loan.”
Recover Payments
So what happens if your bankruptcy lawyer convinces a judge that the MCA deal was actually a legally poisonous usurious loan? If a bankruptcy court decides that a merchant cash advance is actually a criminally usurious loan, the funder may have to give back its payments as constructively fraudulent transfers under section 548(a)(1)(B) of the Bankruptcy Code. That was the argument in In re Anadrill Directional Services. The court let the trustee’s fraudulent transfer allegations proceed on that theory. The logic is this: under New York law a criminally usurious loan is void. So under bankruptcy law, the debtor received no reasonably equivalent value for any payments it made on the deal. And nothing can be reasonably equivalent to nothing. In short, a void contract is meaningless under the law: it imposes no rights or obligations on anyone.
MCA payments are also at risk as “preferences” under section 547 of the Bankruptcy Code. In In re J.P.R. Mechanical, the court granted a trustee’s summary judgment motion. The court ruled that the obligation was a debt as a matter of law, which allows a trustee to recover payments made under a “preferential” time period (i.e., within 90 days before bankruptcy) while the debtor was insolvent. The court also noted that the funder had submitted a proof of claim against the business listing itself as a creditor and asking for payments on debt. Thus, it admitted there was a debt. The argument that the transaction was made in the ordinary course of business failed as the payments at issue were so much higher than the customary daily payments provided for under the agreement.
In a new case, In re Butler Trucking, the debtor attempted to “recharacterize” its MCA debts, treating them as unsecured debt for the purpose of confirming a Chapter 11 plan. The court approved the plan, and no objections were filed. According to the court, in a situation where the senior secured lenders’ liens exceed the value of all collateral, a recharacterized MCA claim is properly a wholly unsecured claim. The plan also rejected all executory contracts, and the MCA agreement was arguably an executory contract. What that means is that the rejection left the funder with only a prepetition unsecured claim.
Future Receivables
Receivables that arise after the petition is filed do not exist at the time the MCA is signed, and therefore were not sold to the MCA funder at that time. You can’t sell what doesn’t yet exist. That means the funder doesn’t own them; the bankruptcy estate does. As the In re IVF Orlando court put it, “One cannot sell more than one owns, and when the MCAs were executed prepetition, the Debtor had no future receivables to convey, only a hope they may come to exist.” Bankruptcy Code §552(a) states that property acquired after filing for bankruptcy is not subject to a security interest arising from a pre-bankruptcy security agreement, so even if the MCA contract provided for a security interest in the receivables, it wouldn’t cover receivables that come in after you file.
To the owner of a business that gets overwhelmed by MCA debt, the takeaway should be simple. The most important thing to look at is not what the contract says, but what both sides actually did and what the contract actually entailed. If the deal, despite what it says, is the economic equivalent of a loan at a usurious interest rate, bankruptcy recharacterization may be able to eliminate or reduce the debt and recover all or some payments already made. The area is still unsettled, but the important thing is to have a seasoned advisor when the situation goes south.
