What It Does and Doesn't Wipe Out
Chapter 7 for an LLC With MCA Debt

The debts of a closed company outlive the company.

An LLC that files Chapter 7 places assets and creditor claims into liquidation under court supervision, while the discharge that wipes personal obligations clean remains beyond the reach of the entity. The case has value as administration. The owners should measure that value before they pay for it.

Eligibility to File and Eligibility for Discharge

Section 727 of the Code states the threshold rule, and the federal courts guide to Chapter 7 repeats it without qualification: discharge belongs only to individual debtors, never to partnerships or corporations. The citation comes first because everything else in this article depends on it.

A peculiar feature of entity liquidation is that the debtor pays for a case that grants it no discharge. The filing is, if precision matters here, the appointment of a trustee rather than a plan for recovery, and whether the MCA agreement calls itself a purchase of future receipts or a loan with a fixed cost, whether reconciliation was offered or ignored, whether the financing statement describes blanket business assets or specified equipment, the characterization dispute changes the treatment of claims inside the case without changing the threshold rule that bars entity discharge.

Consider a hypothetical distributor carrying three MCA positions and a landlord claim through a season of falling orders; the count of funders complicates the schedules without improving the outcome for the entity by a single dollar.

The case gives the company its most supervised ending. The owners wake the next morning with the guarantees still in force, at least where the guarantee language reaches the obligations the trustee leaves unpaid, which counsel must confirm from the executed pages rather than from memory.

Personal Guarantees Survive the Entity Case

Funders pursue guarantees because guarantees pay, and the entity filing changes the address for collection rather than the existence of the promise. A guarantee is a separate obligation undertaken by a person, so the company case leaves it standing in full, and suits against the guarantor proceed outside the entity docket.

The trustee has no power to release a signature the trustee never held.

Counsel should ensure the owner reads the guarantee beside the financing agreement before deciding anything, since some guarantees cover all extensions and renewals while others attach to a single advance. A funder that accelerates debits in order to drain operating cash before a filing forces the timing question early, and owners who act early protect and preserve options that delay would close. The pattern is familiar, though no honest sample is large enough to call it a rule.

What the Trustee Administers

A trustee gathers nonexempt assets, sells them, and distributes proceeds in the priority the Code prescribes, with unsecured MCA balances sharing whatever remains after priority claims are satisfied. Where everything is encumbered or exempt, the trustee files a report of no distribution and unsecured creditors receive nothing, and the record closes without payment.

The trustee (who answers to creditors as a body rather than to the owners who signed the petition, and whose duty runs to the estate even when the owners expected a gentler administrator) assembles bank records with more patience than the owners will enjoy, often from accounts where records are extremely thin.

Payments that reached MCA funders inside the 90 days before filing sit exposed to recovery as preferences, a review conducted from statements rather than from sympathy. A payment to a favored creditor, even briefly before the petition, can therefore return to the estate for division among all creditors.

The trustee divides what exists. Forgiveness belongs to a different chapter of the Code, and to different debtors.

Liens Ride Through the Case

A valid lien that the case does not avoid survives the case, enforceable against the property that secures it. The New York rule on security interests after disposition continues the interest in collateral despite a sale unless the secured party authorized transfer free of the lien, which explains why equipment and receivables rarely emerge unencumbered.

Termination of a financing statement after payoff is a filing act, not a forgiveness of the debt and not a release of the guarantor. Whether courts outside New York apply the same continuance rule is a question counsel must answer from the filing jurisdiction.

A Closing Decision Made With Counsel

Businesses that intend to keep operating should look to reorganization rather than to liquidation, and owners who can fund a negotiated exit should compare that cost against the cost of a trustee administered closing before they choose. Counsel will assemble the agreements, trace the payments, and construct a closing plan that addresses the trustee, the lienholders and the practical reality of lingering guarantees. Resist the urge to sign a fresh acknowledgment of the company balance while closure talks continue, since claims asserted against the owners gain nothing from haste and lose nothing from review.

Delancey Street offers a free confidential initial review for owners weighing closure against continued operation with MCA balances outstanding, and an owner can ask whether the accounts qualify for settlement assistance. The company acts as a settlement company and coordinates legal questions with independent counsel, since it is not a law firm. Simply gather the agreements and the recent statements before the first conversation, so counsel can ensure the advice addresses the obligations shown on the executed pages to bind the owners, even where the timetable has become extremely compressed.

Most owners call months after the balance became unmanageable. The delay is understandable. Rarely does a docket teach what a closing ledger already shows: an entity liquidation ends the business without ending the liability, and the owners who plan for both endings keep more than the ones who plan for one. This is the ledger owners avoid reading until the trustee reads it for them.