A sole proprietorship has no legal separation between the owner and the business. Every contract you sign as a sole prop is a personal contract. Every MCA default is a personal default. The personal guarantee discussion you’d have as an LLC owner doesn’t even apply, because you’re already personally liable for everything. That changes the playbook materially.
| Exposure Category | LLC with Personal Guarantee | Sole Proprietor (Direct) |
|---|---|---|
| Personal Bank Account | Reachable via PG enforcement | Direct exposure, no veil |
| Home (no homestead) | Lien after PG judgment | Lien on business judgment alone |
| PG Enforceability Defense | ✓ Available | N/A, debt already personal |
| Wages Garnishment | After PG judgment | Direct post-judgment |
| Chapter 7 Discharge | Owner files separately | ✓ Single filing |
| Settlement Floor | 40-55% pre-litigation | 35-50% (Ch. 7 leverage) |
What “No Corporate Veil” Actually Means
An LLC or corporation creates a separate legal entity. Creditors of the business have to break through that entity (“piercing the veil”) to reach the owner’s personal assets, and most can’t. Sole proprietors have no such barrier. The MCA funder doesn’t need to pierce anything to garnish your personal bank account, lien your home, or seize your car. Default judgment in the business name is automatically enforceable against you personally.
For most MCA borrowers, this means the personal guarantee fight that LLC owners care so much about is largely beside the point. Whether the PG is enforceable doesn’t matter when the underlying debt is already personal.
The Asset Exposure That Actually Matters
If you’re a sole prop with a defaulted MCA, the assets at risk include: your personal bank accounts (joint accounts are partially protected in some states), your home if you don’t have homestead protection, your vehicles above the state exemption amount, your investment accounts, and your future wages via post-judgment garnishment.
State homestead and personal property exemptions matter enormously for sole proprietors. Texas and Florida have unlimited homestead protection. New York has $179,975 per spouse in NYC and surrounding counties. These exemptions are your biggest defensive asset and the foundation of any sole prop workout.
How Negotiation Looks Different
Funders know sole proprietors have personal assets directly exposed. That cuts both ways. They can be more aggressive in collection, but they also know a personal bankruptcy filing wipes the MCA debt entirely, which gives the borrower real leverage. The negotiation conversation should explicitly reference the Chapter 7 option as a credible alternative.
Sole prop settlements pre-litigation typically land at 35 to 50 cents on the dollar, slightly lower than LLC settlements because the funder sees Chapter 7 as a more probable outcome. Documentation of personal hardship (not just business hardship) is what moves the number.
Chapter 7 vs. Chapter 13 for Sole Props
Chapter 7 wipes out unsecured debt including MCA balances. You must pass the means test (income below state median, generally). You keep exempt assets (homestead, vehicle to a limit, retirement accounts). Non-exempt assets are liquidated by the trustee. For most sole props with modest assets, Chapter 7 produces a clean reset in four to six months.
Chapter 13 lets you keep non-exempt assets in exchange for a three-to-five-year payment plan funded from disposable income. Useful if you have a home with equity above the homestead limit, or if you need to catch up on secured debt like a vehicle loan. Bankruptcy is handled by independent counsel from our referral network.
Practical Steps for a Sole Prop With Defaulted MCAs
- Map your exempt assets first. Know what’s protected before you negotiate.
- Open accounts at an institution with no MCA relationship. Funders sometimes have informal information access; clean accounts protect against pre-judgment attempts.
- Document personal hardship. Personal bank statements, household budget, medical expenses, dependents.
- Get pre-bankruptcy counseling done early so the option is genuinely on the table during negotiation.
- Consider entity formation going forward. An LLC won’t protect you on existing debt, but it changes the calculus on every contract you sign starting now.
Many sole props who go through an MCA workout convert to LLCs as part of the recovery. The conversion doesn’t transfer the existing debt (you’re still personally liable on the old MCAs), but it builds a veil for everything going forward. Cost is low (a few hundred dollars in state fees) and the protection it builds compounds over years.
Senior advisors handle MCA workouts for sole props every week. The numbers are different than LLC workouts, and the strategy is different, but the path forward is just as real.
Delancey Street is a business debt-relief company, not a law firm. When a matter requires legal work, we refer you to an independent attorney from our referral network; the attorney–client relationship is between you and that attorney.
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