MCA Payments Before Bankruptcy: 5 Questions About Preference Recovery

A payment made before bankruptcy can be examined even when the business owed the money and intended to pay it. Preference law concerns the effect of a transfer within the creditor distribution system, although a recent MCA debit is not automatically recoverable merely because it falls within the review period.

1. The Trustee Must Establish the Statutory Conditions

11 U.S.C. Section 547(b) permits avoidance of certain transfers involving a creditor, an antecedent debt, insolvency, timing, and a greater recovery than the creditor would receive in the specified Chapter 7 comparison. Those requirements must be applied to the transaction. The date alone cannot establish the claim.

The ordinary period described in the statute is ninety days before the petition, with a longer period involving insiders under the relevant conditions. Whether a party is an insider and how that affects a transfer require legal analysis. A guaranty should not be treated as a universal rule extending every payment's exposure.

For an MCA arrangement, the nature of the transaction can matter to whether the transfer concerns the debtor's property and an antecedent debt. A provider's purchase label does not resolve the question. Neither does the business's description of every withdrawal as a loan payment.

Counsel and the trustee need the agreements and payment records to apply the test. A spreadsheet of dates and amounts helps, but the legal basis for the transfer belongs beside the numbers.

2. Ordinary Payments Can Still Require a Defense

A recurring debit may feel immune from review because it happened every weekday. Section 547 contains an ordinary course defense, but the statutory conditions must be established. Regularity is relevant evidence rather than a complete legal conclusion.

Preserve the history preceding the review period as well as the challenged transfers. A change in payment amount, collection method, or pressure may matter to the comparison. The business should not discard earlier statements on the assumption that only the final ninety days have any relevance.

The statute also recognizes a contemporaneous exchange defense under specified conditions and a subsequent new value defense. Fresh funding after a payment can require analysis, but an obligation substituted for an old obligation is not automatically new value. The funding and payment sequence matters.

For a renewal, separate the new cash, the amount used to retire an earlier balance, and the new obligation. A headline advance may overstate the value actually supplied at that stage. Counsel should trace the transaction rather than accept a single number labeled renewal.

The statute assigns the trustee the burden of proving avoidability under subsection (b), while the party asserting subsection (c) protection bears the burden associated with that defense. A demand letter should therefore be evaluated against both the asserted elements and the available evidence supporting a defense.

Section 547 also calls for reasonable due diligence in the circumstances, including consideration of known or reasonably knowable affirmative defenses. That provision does not guarantee that the trustee will decline a claim. It reinforces the importance of supplying records that permit an informed assessment.

Avoid treating a small individual debit as categorically protected without counsel reviewing the applicable aggregation rules and adjusted thresholds. The relevant inquiry can differ from looking at one line on a bank statement. A series of payments should be presented as a series, with each transfer preserved.

3. Insolvency and the Distribution Comparison Need Their Own Analysis

Section 547 provides a presumption of insolvency during the ninety days before filing. That presumption is part of the legal framework, not a reason to abandon financial records. The balance sheet and other evidence may remain important to the claim and any response.

The creditor's position in a hypothetical Chapter 7 distribution is another element. A fully secured creditor can present different issues from a creditor lacking sufficient collateral, and the actual interests require examination. The business should not assume that every payment improved the recipient's position by the entire amount.

A payment made through an intermediary should be traced to its recipient. The bank description may name a processor rather than the creditor whose claim was reduced. Preserve the corresponding ledger entry and transfer details so the legal analysis does not depend on an abbreviated transaction label. The entity receiving the money and the entity benefiting from it may require separate identification.

Other debts, collateral values, and priority rules can affect the comparison. A preference analysis therefore extends beyond the one MCA contract. The trustee's account of the estate and the creditor's asserted rights must be assessed together.

This is why a promise to recover all recent MCA payments is unreliable. Even where timing and an antecedent obligation are established, the remaining elements and defenses can change the result. The case requires evidence rather than a calendar calculation alone.

4. Recovered Money Does Not Become the Owner’s Refund

Preference recovery concerns the bankruptcy estate and its administration. An owner should not budget for the recovered amount as personal cash or assume it will be returned to the operating account for unrestricted use. Distribution follows the applicable process.

The amount demanded and the amount recovered may also differ. A claim can be contested or resolved under the procedures governing the case. The business should preserve the records and cooperate with counsel without representing a demand as a completed recovery.

5. Discuss Pre-Filing Payments Before a Delancey Street Agreement

Delancey Street is a debt settlement company that can discuss negotiation of business obligations. If bankruptcy remains under consideration, a bankruptcy attorney should review proposed payments and transfers before the business commits. Settlement services do not replace that legal analysis.

A lump sum paid to one creditor may affect the later case differently from a plan that addresses several obligations. That does not make the payment improper by definition. It means the decision should be assessed in the context of the business's full financial position and possible filing.

Ensure that the proposed settlement has an identified source of funds and a written explanation of the obligations it resolves. Ensure also that payment records remain available if a trustee later requests them. The business should not lose the evidence simply because the account was closed.

Preference law asks how a transfer affected the collective process, even where the original payment was understandable. The best preparation is an accurate history and advice before the transaction. A hurried attempt to favor one claim can outlast the urgency that produced it.