You own a business, and are behind on the payments to your merchant cash advance. Every day the debits come in, taking their share out of your bank account. Now you’re wondering how bankruptcy might be able to help you with the debt you owe on the MCA. The answer isn’t simple. It depends on one question most business owners don’t even think about when they sign an agreement. Did you sell the future receivables, as the contract said? Or did you take out a loan?
If a business is desperate for cash, an MCA is often the first resort since these are fairly quick to close. The funder is willing to skip the diligence that a bank would do. The funder will advance the business a lump sum of money, and the business will agree to pay back a certain percentage of its future receipts until the funder has received far more than it advanced in the first place. You’ll see these usually as daily or weekly ACH debit payments.
Most MCA contracts start by saying that the business is selling future receivables, not borrowing money. The idea is that a “real” sale may put the purchased receivables outside of the bankruptcy estate, while a loan remains the debtor’s obligation. Whether a funding contract is a sale or a loan is one of the most important issues in bankruptcy that is likely to affect the outcome of the case. So, an MCA contract will tell you it is a sale of receivables. That statement may be true, but the reality may be different. To find out, you have to look deeper at the substance of the agreement.
When the business (or the trustee in bankruptcy) wants to push back with a recharacterization fight — claiming that the purchase of receivables was really a loan — two theories come into play. First is usury. The overwhelming majority of MCA agreements are governed by New York law, and any loan with interest over 25% a year is criminally usurious and void. Once a MCA is recharacterized as a loan, that often means that the true interest rate is far higher than 25% a year, so the whole deal can be declared void.
The second theory is avoidance. Under section 548 of the Bankruptcy Code, a debtor (or trustee) can unwind certain transactions done within two years before filing if, at the time the transaction took place, the debtor received less than “reasonably equivalent value” and was insolvent. Avoidance has nothing to do with the interest rate. You could lose the usury challenge (on the rate) but still win avoidance (for lack of reasonably equivalent value). If you paid the funder more than you received, you may have already established lack of reasonably equivalent value.
The Crosby Case
In a recent case, Crosby Tugs, L.L.C. v. Meged Funding Group (In re Crosby Marine Transportation, LLC), Bankr. E.D. La., June 17, 2026, debtors had filed chapter 11 and instituted an adversary proceeding against multiple advance funders. They moved for partial summary judgment against one advance funder, Aqua Capital LLC, and requested that the court re-characterize the ‘Revenue Purchase Agreement’ as a disguised loan and declare the receivables to be property of the estate under section 541.
In the Crosby deal, Aqua advanced $350,000 in exchange for $543,750 of the debtors’ “Future Receipts.” Those payments were to be collected through daily ACH sweeps from the deposit account. The financing agreement had no repayment tied to any one receivable or customer. Aqua took a security interest in all of the debtors’ assets, a personal guaranty from the principal, and a confession of judgment, and the right to debit the debtors’ bank accounts if they defaulted. Both parties agreed there was no dispute about the facts, so the court went straight to summary judgment.
How does a court tell if a funding arrangement is really a sale of receivables or is just a loan in disguise? There are a few tests courts use, but they all come down to one question: who bears the risk that the “sold” receivables aren’t collected? The seller or the buyer? Courts tend to look at substance over form, and if you label it a sale it’s almost never enough to convince them. Generally, if the money (and interest) has to be paid back no matter what you collect, it’s a loan.
The most common way to assess that issue is by applying the three-pronged test laid out in a New York appellate case, LG Funding, LLC v. United Senior Properties of Olathe, LLC (2020):
- (1) is there a meaningful reconciliation provision;
- (2) does the agreement have a finite term, a definite endpoint;
- (3) does the funder have recourse if the merchant files bankruptcy.
Courts today tend to use that approach as more of a guideline rather than a rigid checklist, so look at all the circumstances around the agreement.
In the Crosby case, the court used LG Funding as its guide, and the Aqua agreement looked like a loan from every angle. Aqua’s right to recover on the receivables was not conditioned on the collection of any particular receivable, leaving Aqua with none of the risk a receivables buyer would bear. The UCC-1 filed by Aqua went far beyond the receivables the debtor had claimed to sell: it included all of the debtor’s accounts, equipment, general intangibles, and inventory. The court found this language had the hallmarks of a lending transaction, not a purchase.
Then there were the personal guaranty and the confession of judgment. Add in Aqua’s right to accelerate and sweep all funds and you have a total recourse way beyond any sale. There was also a “reconciliation provision.” The debtors could ask for an adjustment to the weekly remittance but the total owed would not change based upon actual collections. A single missed payment could trigger the default and cut off reconciliation completely. It was arguably “illusory.” There was no term to the agreement per se but a fixed schedule was implied: divide the balance by the daily payment and you know when it ends.
In Crosby the court took all the terms, applied the test for whether it is a purchase of receivables or a loan (that’s the LG Funding test) and held the debtors were bearing all of the risk of nonpayment. Therefore, the court granted summary judgment. The court recharacterized the financing arrangement with Aqua as a disguised loan under New York law, and said that the receivables remain the property of the estate.
For the busy entrepreneur looking at his or her own contract, here are the items the court examined:
- (1) whether the obligation is tied to “actual collections” or “specific customers”;
- (2) whether the method of reconciliation is “illusory” or “bona fide”;
- (3) whether the sum owed will ever change;
- (4) whether the owner has personally guaranteed the transaction;
- (5) whether there is a confession of judgment;
- (6) whether there is a security interest in all the company’s assets; and
- (7) whether failure to pay a single installment creates a default.
If the answers leave all of the risk on you, the deal looks like a loan.
The lesson for business owners with MCA debt: it’s the substance, not the label that matters, and recharacterizing an MCA advance into a loan can turn an obligation to pay the funder into a claim against the funder. If it is a loan and if it is found to be usurious, the contract may be void. Separately, your repayment obligation may be avoided and the funds already paid recovered by you or your bankruptcy trustee under sections 544, 548 and 550 of the Bankruptcy Code. The receivables the funder thought it purchased may even be pulled back into the estate. The moral of this story, is that you should not take for granted that your contract is what it claims to be. Under the right facts, you or your trustee may be able to convert the other party’s claim from a “sale” to a loan, avoid it, recover the payments made and recapture the so-called sold receivables.
