9 Checks Before Signing an MCA Settlement Agreement

Personal guarantees are obligations to pay the lender even if the company cannot. A personal guarantee is a very common requirement in merchant cash advance agreements. Once you signed a personal guarantee, you placed yourself under extra risk if you ever had problems making payments on the cash advance. As a result, you can never assume that settling a merchant cash advance for less than the original debt also relieves you of the personal guarantee. So the lender has 2 legal claims - the debt and your personal guarantee - and your settlement must end both.

Nine Things to Make Sure You Get

The settlement document is the only document that matters, and it’s up to you to make sure it says what it should. Here are nine things to make sure you get before signing or paying anything.

The release is the most important part of the document. Whatever else you get, it doesn’t help you if it only says it releases the business from liability. You must be listed by name as receiving the release also. You need to get both your company and yourself (and all other guarantors) released.

The agreement should clearly state the amount being paid to satisfy that debt, and the dates that payments will be made. Also, the document should be very clear that the merchant cash advance debt will be considered “paid in full” as soon as those agreed payments are made.

Some agreements say that if you fail to make a payment as promised, you again will owe the original debt. You will find yourself right back where you were before you settled! Clearly that defeats the whole point of your settlement, so make sure the document says very clearly what happens if you miss a payment. Even better, try to negotiate some kind of a “grace period” for late payments. You need to know who will let you know if you missed a payment, and how they’ll let you know (mail? email? their lawyer?)

You may be out more money than you think if you settle a lawsuit and default on that agreement. You should read the settlement carefully for phrases that will allow judgment to be entered if you default. That judgment can be entered even without further notice to you, if the document is clear enough. In New York it can even be entered by the court clerk.

The UCC lien needs to be removed once the settlement is completed. The settlement document should explain what steps will be taken to make sure the UCC is released. So get a commitment from the MCA funder to terminate the UCC within a certain number of days after the last payment, and in writing.

Section 9-513 of the UCC requires the lender to remove the UCC within 20 days after getting a written request, as long as nothing is still owed under the agreement. If the lender does not do this, you can go to court and ask a judge to award you a penalty of $500, and also payment of any actual losses the old UCC filing caused you.

The MCA lawsuit should be dismissed under the agreement. If a judgment was already entered, it’s not good enough for the agreement to just say the debt is settled. You need the funder to agree to file a satisfaction of judgment, to show you it has been paid.

If the MCA funder has already taken your funds by debit or by seizing customer card payments, any settlement should end all these levies and seizures, including future ones. The document should promise the funder will stop the debits and notices. That clause should be specific about what steps will be taken, and when.

You should ask the MCA funder what their policy is on reporting to credit bureaus. The agreement should explain how the settled debt will be reported to credit bureaus.

Tax Effect

In general, the Internal Revenue Service considers forgiven debt to be income to you in the year the debt is discharged. The canceled amount usually counts as ordinary income. The regular IRS rule may not apply to MCA money, because “merchant cash advance” money often is structured as a purchase of a future payment receivable, not a loan. Depending on exactly how your agreement is structured, the tax effect may be different.

Lenders and creditors usually file Form 1099-C after you agree to settle a debt and $600 or more is canceled. You must report the settlement to the IRS on your taxes that year. That is true even if you don’t get a Form 1099-C. That doesn’t mean there will be tax to pay. If your insolvency (amount of all debts exceeds your assets) was equal or higher than the forgiven debt amount, then there is no taxable income from the debt forgiveness. Claim the insolvency exclusion when you file Form 982. See a tax pro before year-end if you might file this form.

Promises That Are in Writing and Signed

All you should care about are promises that are in writing and signed by the MCA funder. Do not accept verbal promises, or ones in emails or letters that do not include signature or acceptance. Get the finalized written settlement before making even the first payment under the new settlement agreement.

Keep a copy of every payment you make. When you are at the end, you need to make sure you get specific, signed and written confirmation that your payment schedule has been successfully completed, and that you owe no more. Also, if you have a couple of merchant cash advances, settling one doesn’t settle the other, and each one needs its own settlement and confirmation.

If you are going to close the business and stop operating, settle the guarantee now, not later. Shutting down does not release you from liability. In a way, the personal guarantor is the funder’s “backup” when things go bad with the business. Especially if you’re still in the middle of court proceedings, you should ask a lawyer to look at the settlement agreement before you commit. Once it is signed and delivered, it is yours to live with.