What Happens to MCA Debt When the Business Owner Dies?

Money owed stays owed when someone dies. The debt on a merchant cash advance doesn’t go away. The business borrowed the money, so it still owes it. If you signed your own name, or if you signed a personal guaranty, then the estate is likely liable to repay it. But in most cases, the family doesn’t pay out of pocket. If the estate doesn’t have enough money to pay all the debts, then unsecured creditors usually don’t get paid.

Who Signed for the Cash Advance

Whether or not the estate owes the debt is a question of who signed for the cash advance. If the agreement is in the name of a corporation or LLC, and that is the name of the business, then that’s who owes the money. If the person signed in their own name, not the business, then the debt is personal and goes into the estate. If your business is a sole proprietorship, there’s no separate legal entity between you and the business. It’s just you. That means the business debts become something your personal estate may have to deal with through the administration process.

A personal guaranty is when a company such as a merchant cash advance company, wants some individual to sign for a debt along with the business. Personal guaranties usually survive your death, but there are exceptions. Personal guaranties remain the responsibility of the estate until paid in full or until the funding company releases the estate. But the funder has no duty to release it.

A twist in some merchant cash advance agreements is that they are called personal guaranties but are only triggered if the merchant actually breaches the agreement. These generally require the cash advance company to prove that the merchant actually breached, just like any other contract, even if it’s called a personal guaranty. But some agreements say that closing the business is not a breach by itself.

A business loan is one where the funder gets its money back whether or not the business succeeds. If the lender only gets money back if the business is successful, that’s probably not a loan, at least in New York. The New York courts ask three questions: First, does the merchant cash advance agreement make the merchant pay it back if he stops doing business or goes bankrupt? Second, is there a real reconciliation provision? Third, does the term end in a finite number of months? When the owner dies, it matters whether the funding company can collect even if the business closes down. If the merchant cash advance funding company can collect even when the business closes, the deal looks more like a loan. In 2023 a federal appeals court upheld a ruling that an MCA was a usurious loan partly because guarantors were on the hook if the merchant went bankrupt.

A more difficult question is what happens if you die, but the business keeps running and stays current on the payments. Is the funding company owed a claim against the estate? It’s unclear. A Colorado court said that just because someone has a contingent claim doesn’t mean the probate estate needs to remain open.

Probate Deadlines

The merchant cash advance company, like any other creditor, has a deadline to file a claim against the estate. It can’t just say it’s owed money indefinitely. In Florida, probate deadlines are strict. A creditor must file its claim, even a contingent one, within 3 months after notice to creditors is first published, or 30 days after being served if later. Unfiled claims are barred 2 years after death. But the bar does not prevent a secured creditor, one that recorded a lien on some piece of property, from enforcing that lien.

If a merchant cash advance company records a UCC-1 filing against a business, that will last for 5 years from the date it is filed, unless the company extends the lien. Among creditors, if the estate can’t pay its debts, there is a hierarchy of who gets paid first. Federal debts like taxes come first. And, any executor who pays creditors in the wrong order can be held personally liable up to the amount paid.

Don’t Pay These Debts Out of Their Own Pockets

Your spouse and kids usually don’t pay these debts out of their own pockets, unless they co-signed. Your spouse usually doesn’t pay unless they’re in a community property state like California or Texas. And your kids don’t pay unless one of them handles the estate and doesn’t follow the rules on how to handle it.

When you die, your family has choices about what to do with the business. First they have to decide whether to keep running it, sell it, or close it. If it keeps operating, can it keep making the payments? If the business has to close, that won’t erase the funder’s rights in collateral it recorded against the business.

Life insurance in your spouse’s name is not automatically earmarked for the business. If you name your spouse, it probably doesn’t mean you want your business creditors paid. When a policy pays off, the creditor with a collateral assignment gets its share, then it goes to whoever you named in your policy. But insurance companies can take time to pay off policies. And count every dollar of that insurance payout only once, since it only gets paid once.

Right now, pull out every advance agreement you’ve ever signed. See what the business owes, what you personally promised, and what your spouse signed. Recheck whenever you take a new advance or sign a new guaranty.