Debt Settlement and Litigation Defense: Six Decisions for an MCA Dispute

When a merchant cash advance goes bad, most business owners ask the same question: do I fight the funder or do I make a deal? The honest answer is it depends on your unique situation. That’s because every merchant cash advance has a different story, and every MCA funding company has a different set of priorities and negotiating capabilities. Six decisions will help you choose the best next step when a Merchant Cash Advance goes bad. As long as you understand the six of them, you’ll have a good idea how to move forward at every fork in the road.

One common mistake is in assuming that a settlement and a defense are opposites. They are actually two complementary strategies. If you want to move your matter towards a successful resolution, you have to understand that you may need both.

Lawsuits Put You on the Clock

Before anything else, decide whether your merchant cash advance dispute has progressed to the level of a court lawsuit. If it has, your situation has changed fundamentally. Lawsuits put you on the clock, and it’s good to know when your clock has started. Your clock starts the moment you are served with legal papers, not at the time that you find out about them. In New York state court, the time to answer the complaint is usually 20 days. You can’t stop a court from acting by promising to settle a lawsuit while the case is still pending. This is because the court is the one driving the case - not you. The decision to settle or fight will have to be made at almost every stage of the litigation process.

Another mistake is withholding payments, or threats to withhold payments, if you hope to force the funding company’s hand at the negotiating table. This strategy can lead to serious, and often unexpected consequences. When you block MCA payments, there’s a high chance that you’ll be in default, with all the added fees that come with it. This means that your funder can demand that you pay the entire outstanding balance of your advance if you default. The funder might tell your processor what’s going on, or go after your guarantor. Such actions may not be enforceable. There are plenty of risks, but the worst is that the funder will sue you. The decision to stop making payments should only be made with the help of an attorney who has a full picture of your business’s finances, and after a careful consideration of all the ways that the funding company could respond.

How Strong Your Defense Is

Once you know how much time you have, you need to find out how strong your defense is. In legal terms, “defenses” are arguments that, if you prevail, will lower or eliminate the amount that you owe on your MCA. Just because the funder has written a default notice does not mean that all legal issues are settled. There may be defenses. The important issues include the merchant agreement, the payment history, the funder’s conduct, the state of the law, and, where receipts have fallen, the reconciliation clause.

New York recognizes usury under the criminal code, which defines it as a felony. There are limits: the charge or loan must have an interest rate over 25% per year, and the defendant must have known what they were doing. There was a 2021 ruling by the New York Court of Appeals that a criminally usurious loan was void from the beginning, and that a corporation had the right to use criminal usury as a defense. The biggest technical issue around usury is whether or not your MCA is a loan. That decision, in turn, has everything to do with how your funding agreement was written.

If you signed a confession of judgment, you may find that your funder has filed it, perhaps after a dispute. In New York, they can file it in the county where you live or do business. There is a three-year window after signing.

The many law firms and debt relief companies that hold out the prospect of negotiating your merchant cash advance debt are not all the same, and the differences matter. When a funding company sues you, or when the time comes to call the shots under your guaranty, who you work with makes a difference. Take care to ask who’s negotiating, and whether they will defend you if you’re sued; also take a close look at what is and what isn’t covered by your fees. Enrolling in a debt relief program does not guarantee that a lawyer will defend you if you are sued. Whoever reviews your case needs to see it all: agreements, guaranties, payment history, bank statements, notices, court papers, and every other MCA.

The Settlement Range

It’s tempting to believe that there is one firm percentage of the advance balance that you can settle on. The truth is a lot more complicated. The settlement range depends on the details: your docs, how you’ve paid, the value of defenses you might raise, and what you can afford.

Even if your best option is to make a deal, there’s still a lot to decide. Just coming to an agreement on an MCA dispute, by itself, is not enough. A poorly worded agreement might leave issues hanging, and this could expose you to legal risks. The terms to check include: what debts or guarantees, if any, are released; whether there is enough time to make each payment without fail; what happens if you miss a payment; the end of daily payments.

Even after you make a settlement deal, it’s not over. You have to make sure the details are done right, otherwise, you can still have problems down the line. You should find out who will file to end any lawsuit if there is one; who will end any UCC lien; whether you need a deal with each funder individually; and whether you have proof that every step was done.

In general, when you pay less on a debt than you owe, the amount of debt forgiven becomes taxable income. Some exceptions may apply, like insolvency, or settling in a bankruptcy. Seek tax advice.

Bankruptcy is still on the table when the fight-or-a-deal doesn’t work out. You may be eligible for a Subchapter V Chapter 11 bankruptcy. Under the federal Bankruptcy Code, a small business with up to $3,424,000 in debt may pursue this kind of reorganization.

Whether you fight or make a deal, you want to do what’s right for you and your business. Not all disputes are alike, and not every business owner needs the same type of legal help.