Is an MCA a Secured or Unsecured Claim in Bankruptcy? It Depends

A financing statement answers the wrong question.

The document tells a reader that a funder claims an interest, while the bankruptcy answer depends on collateral value, perfection and the true character of the transaction. Amount, enforceability and priority each require their own inquiry, and the filing alone settles none of the three.

Section 506 Divides Every Claim by Value

Section 506 of the Code supplies the measure before any argument begins: an allowed claim secured by a lien is secured only to the extent of the value of the creditor interest in the estate interest in the property, with the deficiency treated as unsecured. The statute comes first because funder correspondence never quotes it.

A funder holding a valid perfected blanket lien is therefore secured up to the value of the encumbered business assets and receivables, and unsecured for every dollar above that value. The deficiency portion joins the general unsecured pool, sharing pro rata with trade debt and card balances, and owners who expected the lien to cover the whole balance discover the split only when the trustee distribution arrives.

Collateral of thin value against a large balance produces a mostly unsecured claim wearing secured papers, a result that surprises owners who assumed the filing fixed the recovery.

The division (which turns on appraised worth rather than on asserted balance, and which requires evidence of what the ovens, the inventory and the receivables would bring at a sale conducted under present conditions) rewards the owner who values assets early and punishes the owner who accepts the funder arithmetic without question.

The Filing Proves Less Than Funders Claim

A financing statement proves neither the amount of the debt nor its enforceability. Signing the security agreement can itself authorize the filing, so the appearance of the lien in the public record establishes procedure rather than substance. Perfection, collateral description and proceeds tracing remain separate inquiries, and the New York rule on security interests after disposition continues the interest in identifiable proceeds unless the secured party authorized transfer free of the lien.

Trustees test these links as a matter of routine, and unperfected interests face avoidance with the quiet regularity of a clerk stamping forms. The New York termination procedure for financing statements adds a further distinction worth keeping: removal of the filing after payoff is a records act, not a forgiveness of any balance and not a release of any guarantee.

The filing announces a claim. The Code decides what the claim is worth.

The label on the first page is where analysis starts, which is why it should never be where analysis ends.

Purchase or Loan Changes the Category

Bankruptcy does not take the funder label at face value. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, the appellate court examined reconciliation, finite term and bankruptcy recourse when considering whether repayment was absolute, and the Second Department decision in LG Funding allowed a defense to proceed on that particular record without classifying every agreement sold under the MCA name.

A reconciliation clause in a contract that never reconciles functions the way a fire exit functions in a building with sealed doors: present on the diagram, absent in the emergency. You sign the stack in an afternoon and learn what it meant when the trustee reads it back to you.

Where the transaction is in substance an unsecured purchase of future receipts with no lien, the funder holds a general unsecured claim sharing pro rata with other unsecured creditors. Ownership questions precede lien questions where the sale was genuine, since a buyer of receipts owns what it bought rather than holding a claim against the seller, though few MCA specimens survive that analysis once reconciliation and recourse provisions are read together, a point counsel tests against performance rather than against marketing.

Where the substance is a loan with an extremely broad collateral description, the claim divides under Section 506 as any secured claim divides. Counsel should identify and value the collateral before choosing which story the schedules will tell.

Liens Survive the Discharge

A valid lien that the case does not avoid remains enforceable against the property after the case, even where the personal obligation behind it is discharged. Discharge wipes the promise. It leaves the encumbrance where the filing placed it.

The lien stays on file. The mail keeps arriving.

A Collateral Audit Before Any Filing

An oblique answer to a direct question about secured status signals that the audit was never performed. Counsel will review and analyze each agreement, confirm perfection in the filing office of the correct jurisdiction, test the collateral description against the assets owned at filing, and construct a valuation that addresses the court rather than the funder. Steps the owner takes, or does not take, before the petition will decide how much of the funder claim survives contact with Section 506.

Delancey Street offers a free confidential initial review for owners whose MCA stacks include blanket liens and competing filings, and a caller can ask whether the accounts qualify for settlement assistance. The company operates as a settlement company and coordinates legal questions with independent counsel, since it is not a law firm. Simply assemble the agreements, the financing statements and a current asset list before the first conversation, so counsel can ensure the strategy reflects the collateral in existence at filing, even where records are extremely thin and the cushion above secured value looks extremely narrow.

Most owners discover the bifurcation rule in a conference room, months after it mattered most. The timing is regrettable. Resist the urge to concede secured status in correspondence, even casually, since an admission about the lien, made to buy time, can narrow options counsel meant to keep open, and funders that press for such admissions act in order to fix a value the court might otherwise reduce. Attorneys should ensure no stipulation is signed until the perfection search is complete and the valuation evidence is in hand. This is the audit that decides what the filing was worth.