How Can MCA Loans Avoid Repayment Obligations in Bankruptcy or Probate Cases Under North Carolina Law?

1. Detailed Answer

Merchant cash advances (MCAs) often look like loans, but lenders structure them as purchases of future receivables. Under North Carolina law, a true purchase of receivables does not create a debt obligation. In contrast, if a court recharacterizes the transaction as a loan, it triggers repayment claims in both bankruptcy and probate.

A. Structuring MCAs as Purchases of Receivables

• Sale vs. Loan. Labeling the deal a sale of future credit card receipts helps avoid a debt claim. The business assigns a percentage of daily sales to the funder until it remits a fixed advance amount plus a fee.
• Non-recourse language. Include clear disclaimers that the funder bears the risk if receivables decline. Avoid personal guarantees.
• No security interest. Do not grant a lien on personal or real property. A security interest suggests a loan and can lead a court to recharacterize the transaction.
• Fixed purchase price. State the total amount the funder pays up front and the exact amount the merchant will pay back. Avoid terms framed as an interest rate or finance charge.

B. Avoiding Recharacterization in Bankruptcy

During bankruptcy, the debtor’s estate includes obligations to true lenders. Courts look at substance over form. Key factors to avoid a loan claim:

• Absence of usury. North Carolina caps interest on written loans at 8% under G.S. 24-1. If a funder charges more, it must hold a license under G.S. 53-166. An unlicensed high-rate lender risks unenforceability.
• Risk allocation. Document that the funder loses money if receivables don’t materialize. A true loan puts repayment risk squarely on the borrower.
• No maturity date. Loans require a due date. Structure the agreement as open-ended until the factor collects its share of receivables.

C. Avoiding Claims in Probate

When a business owner dies, the probate estate includes debts owed by the decedent. A properly structured MCA is not a debt of the individual but a sale of corporate or business assets.

• Entity distinction. Ensure the agreement sits with the business entity—not the owner personally.
• No personal guaranty or recourse. Personal recourse drags the owner’s estate into the debt pool of Chapter 28A claims.
• Clear assignment of future receivables. The estate administrator sees no traditional loan claim to file if funds never become due as debt.

2. Key Contract Terms and Legal Factors That May Render an MCA Unenforceable

• Usury Violations. Exceeding the 8% cap on written loans without a license under G.S. 24-1 and G.S. 53-166 can void the obligation.
• De Facto Security Interests. Granting a lien on equipment or real estate may trigger secured-creditor rights and lead courts to treat the deal as a loan.
• Misleading Labels. Calling an agreement a ‘sale’ while reserving repayment guarantees looks deceptive in court. Substance controls over form.
• Personal Guarantees. Any guaranty or recourse provision pulls the business owner’s personal estate into the liability pool in probate or bankruptcy.
• Non-compliance with Business Court Precedents. North Carolina courts have struck down improperly disguised loan documents (see recent N.C. Business Court decisions).

Conclusion and Next Steps

Properly structuring a merchant cash advance as a sale of future receivables helps avoid triggering repayment obligations in bankruptcy or probate under North Carolina law. Avoid usury, personal guarantees, security interests, and misleading contract language that may recharacterize the deal as a loan.

If you need advice on drafting or defending MCA agreements, Pierce Law Group has seasoned attorneys ready to guide you. Contact us by email at intake@piercelaw.com or call (919) 341-7055 for a consultation.