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 funders structure them as purchases of future receivables. Under North Carolina law, a true purchase of receivables generally does not create a debt obligation. In contrast, if a court recharacterizes the transaction as a loan, it can trigger 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 support characterization as a receivables purchase, but courts look to substance over form. The business assigns a percentage of daily sales to the funder until it remits a fixed purchased amount.
Non-recourse language. Include clear disclaimers that the funder bears the risk if receivables decline. Avoid personal guarantees.
No security interest. Granting a lien on personal or real property may suggest a loan and can support recharacterization, but it does not by itself determine the issue.
Fixed purchase price. State the total amount the funder pays up front and the exact amount of receivables purchased. Avoid terms framed as an interest rate or finance charge.

B. Avoiding Recharacterization in Bankruptcy

During bankruptcy, the debtor’s estate includes legal and equitable interests of the debtor, and creditors may assert claims depending on the true nature of the transaction. Courts look at substance over form. Key factors relevant to loan recharacterization include:

Usury. North Carolina’s general legal rate is 8% under G.S. 24-1, but other statutes may authorize different rates depending on the transaction. If an MCA is recharacterized as a loan, usury analysis depends on the applicable statute and facts.
Risk allocation. Document that the funder loses money if receivables don’t materialize. A true loan puts repayment risk squarely on the borrower.
No fixed maturity date. A fixed due date may suggest a loan, while an open-ended collection period tied to receivables may support sale treatment.

C. Avoiding Claims in Probate

When a business owner dies, the probate estate may include debts owed by the decedent. A properly structured MCA may be treated as an obligation of the business entity rather than the individual owner.

Entity distinction. Ensure the agreement sits with the business entity—not the owner personally.
No personal guaranty or recourse. Personal recourse can expose the owner’s estate to claims under Chapter 28A.
Clear assignment of future receivables. Clear assignment language may support the position that the transaction is not a traditional loan claim.

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

Usury Violations. If an MCA is recharacterized as a loan, charging interest in excess of the rate permitted by applicable North Carolina law may render some or all charges unenforceable and may subject the lender to statutory remedies.
De Facto Security Interests. Granting a lien on equipment or real estate may support an argument that the deal functions as a loan.
Misleading Labels. Calling an agreement a ‘sale’ while reserving repayment guarantees may undermine the stated characterization. Substance controls over form.
Personal Guarantees. Any guaranty or recourse provision may expose the business owner’s personal estate to liability in probate or bankruptcy.
Non-compliance with applicable North Carolina precedent. North Carolina courts may disregard labels and analyze the actual economic substance of the transaction.

Conclusion and Next Steps

Properly structuring a merchant cash advance as a sale of future receivables may help avoid recharacterization as a loan in bankruptcy or probate under North Carolina law. Avoid personal guarantees, misleading contract language, and other terms that may support recharacterization.

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.

How Can MCA Loans Avoid Repayment Obligations in Bankruptcy or Probate Cases Under North Carolina Law, and What Contract Terms or Legal Factors Might Render These Debts Unenforceable?