Should I Restructure My MCA Debt or File Chapter 11 in 2026?

If you’re a business owner who is thinking about restructuring your MCA and considering Chapter 11 in that process, make sure you are aware of the one question that can make a huge difference - is the MCA truly a sale of receivables, as the agreement states, or a loan? The bankruptcy courts look beyond the name of the contract.

Lots of small businesses will do a deal with a merchant cash advance (MCA) because they are a cinch to close. That’s because the MCA funder isn’t going to do the due diligence that’s usually required in a bank, so it can close very fast. In an MCA, the funder advances the business a lump sum. In return, the business promises to return a set percentage of its future sales until a substantially higher ‘purchased amount’ is repaid, usually through daily or weekly ACH debits over a short period of time.

Most MCA agreements spell out that it’s a sale of future receivables and not a loan. Why? Because a genuine sale could put the purchased receivables outside the bankruptcy estate, while a loan would remain an obligation of the debtor. For a business in bankruptcy, the distinction between purchase and loan can mean whether the funder walks away with estate assets or whether the debtor gets to claw some value back.

Two Ways This Challenge Happens

So if you have an MCA, or if you are the trustee taking over a business that has an MCA, how does the challenge to the MCA work? For starters, there are really two ways this challenge happens. The first is usury. New York law, which governs most of the MCA agreements, makes loans that charge over 25% per year in interest criminally usurious, and void. And because the interest rate after an MCA is recharacterized to a loan is frequently well above 25% per year, the MCA may then be declared void.

The second is what’s called avoidance actions under the Bankruptcy Code. This is under section 548. The debtor or trustee can avoid obligations and transfers made within two years of filing, if the debtor received less than reasonably equivalent value while insolvent. And the debtor doesn’t have to win the usury argument, in order to win on avoidance. For example, if the money paid to the MCA funder was more than the money the debtor received, there may be a lack of reasonably equivalent value.

Crosby Marine Transportation

A recent case makes this point. The case is called Crosby Tugs, L.L.C. v. Meged Funding Group (In re Crosby Marine Transportation, LLC). The Bankruptcy Court for the Eastern District of Louisiana decided it on June 17, 2026. The debtors, who had filed Chapter 11, sued some MCA funders. They asked for partial summary judgment against one of those funders, Aqua Capital LLC. Specifically, they sought a recharacterization of the “Revenue Purchase Agreement” between them as a disguised loan, plus a determination that the purchased receivables were property of the estate under section 541 of the Bankruptcy Code.

Aqua then funded $350,000 for $543,750 of the debtors’ ‘Future Receipts’, which were collected by way of daily ACH drafts from the debtor’s deposit account. The repayment amount was not linked to any particular customer or receivable. The agreement and ancillary documentation also provided a security interest in all of the debtors’ assets, a personal guaranty from the debtor’s principal, a confession of judgment and a post-default right to debit the debtors’ accounts. The parties agreed there were no disputed facts, so the case was decided by summary judgment.

There are a number of different recharacterization tests, but they all basically ask the same question: who bears the risk that the ‘sold’ receivables won’t get paid, the funder or the debtor? Bankruptcy courts generally look to substance over form, and calling the agreement a ‘sale’ is almost never determinative. Usually, an MCA agreement will be treated as a loan if the advanced funds, plus interest, must be repaid regardless of what the debtor actually collects. The most common standard comes from a 2020 New York appellate case, LG Funding, LLC v. United Senior Properties of Olathe, LLC. It examines three factors: (1) whether the contract has a meaningful reconciliation provision; (2) whether the contract is for a defined term; and (3) whether funder would have recourse in the event of merchant’s bankruptcy. Courts are increasingly treating these factors as a framework rather than a checklist and viewing the whole picture.

Under the LG Funding test, the Crosby agreement looked like a loan. Aqua’s right to collect did not depend on any one customer’s receivable, so Aqua assumed none of the risk of collection that it would have assumed had it purchased the receivables. Its collateral, secured by its UCC-1 filing, extended to the debtors’ accounts, equipment, general intangibles and inventory rather than being limited to the receivables supposedly purchased. The court observed that the nature of this collateral package more closely resembled a lender/borrower relationship than a purchase of receivables. The principal’s personal guaranty, the confession of judgment provision, and Aqua’s right to accelerate the debt and sweep all funds gave Aqua extra recourse beyond any sale. The reconciliation provision also suggested a loan. The debtors could request a change to the weekly payment, but the total obligation remained the same regardless of how much the debtor actually received, and a single missed payment could trigger a default that ended the reconciliation of payments. The court called the reconciliation provision arguably ’illusory’.

The agreement did not contain a fixed term, but it did have an implied term (anyone could figure out the term by dividing the debt amount by the daily payment amount). Applying the LG Funding factors to the agreement, the court determined that the debtors assumed all of the risk of nonpayment. It granted summary judgment and recharacterized the Aqua agreement as a ”disguised loan” under New York law. The receivables stayed with the estate.

Look at the Substance of the MCA Agreement

That means for a business owner the message is, the bankruptcy court is going to look at the substance of the MCA agreement, and not its label. Getting an MCA treated as a loan in a bankruptcy case can turn a payment obligation into an opportunity for recovery: a usurious loan may be void, payments may be avoidable and recoverable under sections 544, 548 and 550 of the Bankruptcy Code, and the receivables the funder claims to have bought may come back to the estate.

So if you are choosing between restructuring an MCA or filing Chapter 11, do not assume that the ‘sale’ you signed is a true sale. Read it as a court would: Is repayment based on what you actually collect? Is the reconciliation clause real? Is there an effective end date? What’s the funder’s recourse (personal guaranty, confession of judgment, blanket lien on all assets)? As Crosby shows, with the right facts, a debtor or trustee can recharacterize the deal, avoid and recover the payments, and recover the receivables the funder thought it had bought outright.