When you default on a Merchant Cash Advance (MCA), sometimes, paying back debt can feel like pouring money down the drain since you feel like you’re about to go out of business. Why bother repaying the debt, if you don’t think you’re going to keep your doors open? Many of our clients at DelanceyStreet Debt Relief face this scenario after they’ve taken on too many MCAs, or if a single MCA becomes unmanageable due to unexpected drops in revenue.
Often, many business owners accrue business debt, because they were hoping to grow; or perhaps they needed a life line. Either way, now – that debt is toxic, and it’s impossible to keep up. The MCA lender can take legal action quickly—especially if there’s a Confession of Judgment (COJ) in the agreement.
Defaulting on an MCA: Why It’s Such a Big Deal
Defaulting on your MCA typically means you’ve missed your daily or weekly ACH payments. With MCAs, missing even a few payments can lead to a chronic pattern of late payments. This can be an automatic trigger for an MCA default. Unlike traditional loans, MCAs often have nuanced terms allowing the provider to freeze your bank accounts or file a lawsuit rapidly. If you signed a personal guarantee, then you could be personally liable for the debt, meaning your personal credit—and assets—are at risk too.
Just like other unsecured business debt, when you start missing payments, the additional fees and penalties can pile on. In many cases, the act of stacking merchant cash advance loans can quickly sink a business, leaving owners dealing with multiple MCAs, credit cards, and SBA loans—not to mention vendor debts. The biggest takeaway: default on an MCA is serious and can result in swift legal consequences that can choke your cash flow.
How MCA Lenders Enforce Defaults
Many MCAs include aggressive enforcement tools. For instance, a COJ lets the lender obtain a judgment without the usual notice or hearing. This can result in frozen bank accounts, wage garnishments, or liens on receivables if the MCA is considered a secured transaction under the Uniform Commercial Code (UCC). In some states, the court might recognize the MCA as a disguised high-interest loan, which can open the door to challenges under local usury statutes. But achieving successful debt negotiation, and settlement, isn’t easy. It requires immense knowledge of the law, great negotiation skills, and the ability to fend off potential lawsuits.
Key points you might see in an MCA agreement:
- Confession of Judgment (COJ)
- Personal Guarantee
- Daily/Weekly ACH Withdrawals
Penalties and Potential Consequences
If you default, many MCA lenders will swiftly move to enforce their rights. They may freeze your accounts immediately, which can cause your rent, payroll, and vendor checks to bounce. This often results in issues with creditors and vendors, and your credit score can drop—making it harder to secure financing. Worse, if they successfully collect a judgment, you could see:
| Consequence | Real-World Impact |
|---|---|
| Bank Account Freeze | Inability to pay essential bills like payroll and rent |
| Lawsuit for Breach of Contract | Significant legal fees, potential personal liability |
| Confession of Judgment Enforcement | Swift judgments, liens on receivables, potential asset seizure |
| Damaged Business & Personal Credit | Reduced financing options, higher interest rates, and vendor distrust |
Often, many of our clients first realized they were in distress because they failed to make their minimum payments, leading to a chronic pattern of late fees—then they noticed how quickly the MCA provider escalated the situation. Lenders prefer you keep paying, and they might rely on contract provisions to accelerate the debt and expedite collection.
Navigating Tax Implications
Something rarely discussed is the tax impact of any potential debt relief. According to IRS Publication 4681, if your MCA provider forgives or reduces your debt, you may have to report that forgiven amount as taxable income. If your liabilities exceed your assets, you might qualify for the insolvency exception, but this can be complicated. You should consider discussing this with a tax professional. You don’t want to settle your MCA, only to realize you might owe taxes on forgiven debt.
Different Defense Strategies to Consider
Our experience at DelanceyStreet Debt Relief shows that the right approach depends heavily on your specific situation. But here are a few pathways people often explore:
- Direct Negotiation with the MCA Lender
If you show your lender the difficulties you’re facing, they may adjust the daily payment or stretch out the repayment plan. Lenders don’t want you to file bankruptcy. But any relief might be temporary. They are not in the business of restructuring the debt. They are in the business of getting money back. - Business Debt Consolidation
Multiple MCAs can sometimes be combined into a single loan with a lower overall payment. But you’ll need to qualify based on credit and other factors. This is not an easy solution. - Debt Settlement and Negotiation
Our team regularly negotiates with lenders to reduce the total balance. This can help if your MCA debt is overwhelming, but it might impact your credit and could have tax implications. This is something which has to be done carefully. - Challenging the MCA as a Loan
If the terms strongly resemble a high-interest loan, some courts may recharacterize it, potentially limiting how much the MCA provider can collect. - Bankruptcy Options
Chapter 11 or Subchapter V might let you reorganize, while Chapter 7 is more of a last resort. Each has different consequences for your business operations.
Scenarios from Real-World Clients
Scenario A: Frozen Accounts and a COJ
A New Jersey business owner misses three daily ACH withdrawals. The MCA provider enforces a COJ in New York. Suddenly, the operating account is frozen, and payroll can’t be met. Employees threaten to quit, and the landlord demands payment. Our team negotiated a partial settlement to unfreeze the account, then worked on a longer-term plan.
Scenario B: Stacked MCA Debt
A restaurant owner took out three MCAs in quick succession. The combined daily draws exceeded revenue. He defaulted on all three. We helped consolidate the debt into a single payment structure, while the owner tightened business expenses. Ultimately, he avoided bankruptcy.
Unexpected Issues That Might Arise
- Cross-Default Provisions: Missing payments on one debt may automatically trigger default on others. There might be stacking clauses as well, which kick-in, resulting in excessive fees.
- Tax Consequences from Forgiven Debt: Reduced balances might lead to 1099-C forms.
- Damaged Relationships with Vendors: If word spreads you’re behind on MCA payments, suppliers may demand stricter terms. This could choke off your cash flow.
Our Process at DelanceyStreet Debt Relief
When you call us:
- We analyze your MCA agreements, bank statements, and overall financial health. We do a deep dive.
- We create a plan tailored to your situation, whether that’s settlement, consolidation, or other forms of debt relief.
- Our sister law firm gets involved if legal action arises.
- We aim to reduce your overall debt load and help stabilize your cash flow.