MCA Payments Before Bankruptcy: 5 Questions About Preference Recovery

MCA payments made in the 90 days before filing for bankruptcy can be clawed back as a preference by the bankruptcy trustee or by the business itself as debtor in possession in Chapter 11, but usually only if a court treats the MCA as a loan (a debt), not a true sale of receivables.

For example, say a funder pays $90,000 to buy $140,000 of future receipts, and takes about $4,000 daily in ACH debits until the $140,000 is paid off. The effective annual rate can exceed 300%.

Clawbacks or preferences happen if a bankruptcy trustee can show (a) payment on a pre-existing debt, (b) to a creditor, (c) while the business was insolvent, (d) within 90 days of the filing, and (e) as a result the creditor got more than it would have in a liquidation in Chapter 7. The time window begins from 90 days before the debtor’s bankruptcy filing and in some cases goes back a year if the transfer was to an insider.

The law presumes the debtor was insolvent during the 90-day period. So the MCA must come up with evidence that the company wasn’t insolvent. The trustee has the burden of proving the elements of a preference. The creditor in a clawback action carries the burden of proving defenses like the ordinary course of business and new value. If a total of less than $8,575 was paid to one creditor, the trustee can’t recover it. This threshold applies to business cases filed on or after April 1, 2025.

A Loan, Not a Sale of Receivables

If the MCA was treated as a sale, the MCA isn’t seen as a debt to be repaid. The MCA then shouldn’t be able to have its advance payments clawed back by a bankruptcy trustee. Funder and company may call it an advance, a sale of receivables, but it may not turn out that way in a challenge in court later. Courts should look to substance and not form. Is the funder absolutely entitled to repayment no matter what? Does the funder bear the risk that the receivables won’t be collected? In a real sale the funder bears the risk the receivables go uncollected. If repayment is always owed, the risk is on the merchant, and the financing is seen as a loan.

Courts look for features of an MCA contract that show it’s not really a sale but instead a debt that the merchant must repay no matter what. They include a reconciliation clause that doesn’t really bind the funder; a fixed term, which can be confirmed by dividing the daily payment amount into the funder’s total amount; funder remedies that survive bankruptcy; personal guarantees, and taking a security interest. One reason a judge might find an MCA a loan not an advance purchase is if it doesn’t really bind the funder to reimburse overpayments, or the merchant can’t demand a reconciliation once in “default.” Another factor is if the contract doesn’t identify what receivables are actually being bought.

In In re J.P.R. Mechanical, a May 2025 decision, the New York bankruptcy court ruled for the trustee over the funder’s defenses about it not really being a loan. The terms and language in the agreement, the agreement’s overall structure, and the parties’ conduct showed that the company was obligated to pay back no matter what, and that J.P.R. really had the risk if the receivables weren’t collected. So it was a loan, not a sale of receivables. This ruling was strengthened by the fact that the funder, in its own filing for claim against the estate, called itself a creditor. The court held that the payments on the MCA, while the company was insolvent, within the 90 days were recoverable as preferences.

The J.P.R. court noted another issue. A bankruptcy was supposed not to be a default; but the contract gave another way around it. The funder could treat a filing as “interfering” with the funder’s collecting. If so, the guaranty could be activated.

In re Anadrill is another way to get away from the question of MCA payments being preferences. In that January 2026 case, the court let the trustee’s fraudulent transfer claims go forward. Reasoning: if the MCA is a criminally usurious loan it is void under New York law, so the business got no reasonably equivalent value for its payments.

A funder’s main defense to a clawback motion in court may be the ordinary course of business exception. In J.P.R. the funder’s defense was undercut by the large size of payments far above the routine daily amounts. Just when the MCA was taken out may be decisive. In two cases the same funder, using the same MCA contract form, won one preference defense over a business that had been using MCA-type advances for years. In a parallel case against another merchant the funder lost a defense to clawback when it signed about 2.5 months before the company filed for bankruptcy.

Once a payment is avoided, the bankruptcy trustee goes after the payment’s recipient to get the money. Or it can recover from someone else who benefited from it, like an MCA guarantor. The funder’s claim against the business or the debtor’s bankruptcy estate is disallowed until the funder makes good on the amount due in the clawback. When the funder has paid that amount back to the estate, then the funder has a pre-bankruptcy claim for what it paid. In a business bankruptcy case a bankruptcy trustee, or the company as debtor in possession, must usually bring a preference clawback lawsuit within two years after the order of relief. The deadline is earlier if the bankruptcy case is dismissed or closed before those two years run out.

If you see a bankruptcy as coming soon, what should you do? One thing is to pull your MCA documents and analyze the terms and who signed a personal guarantee. Do the terms show it’s really a sale or that the funder doesn’t bear the risk if receivables aren’t collected? Then add up how much was paid to the funder in the 90-day period before the company’s bankruptcy filing.

Bankruptcy may work to restructure an MCA if it is really a loan and may let you recover the recent payments. Your MCA should be reviewed by an attorney experienced in MCAs and bankruptcy.