Ignoring an MCA Lawsuit: 6 Risks That Do Not Follow a Fixed Schedule

Ignoring a merchant cash advance lawsuit could result in getting a default judgement against you and your business. A default judgment can lead to bank restraints and levies, which can effectively tie up the funds of a business. The legal repercussions rarely happen on a set timeline. You never know when your business bank accounts or personal bank accounts will be tied up. This article outlines 6 dangers that could strike anytime.

Many of the merchant cash advance agreements pick New York State law and choose New York courts to settle disputes. Today, even a small business in Podunk, Iowa, may find itself having to answer a merchant cash advance suit in New York.

The first risk is this: The clock for your answer may have started running before you get the Summons and Complaint. For example, in New York, a business served via the Secretary of State is considered to be served the day that the complaint is received by the Secretary of State. The company will then get a copy in the mail, but the clock is running from the earlier day. Once service of papers is completed, you have 20 days to file a response (also called an “answer”) if you were served with papers in person, or thirty days if service was done by certain other methods. Under New York rules, a plaintiff that takes service through the Secretary of State must also send a copy of the papers via regular mail, at least 20 days before judgment.

The second risk is this: the judgment may issue in your absence. If the complaint has a dollar amount in it and you don’t file a response, the creditor can have the court clerk simply enter judgment for that amount, plus costs and interest. The clerk has not made any decision as to whether you owe the debt or whether the amount is proper. The creditor has up to a year after the default to ask for it. So silence is not safety. After the judgment, the funder has the same kinds of powers and rights as if it had won a trial in court. Depending on how aggressive a funder is, it may act within days or wait several months before taking any steps.

The third risk is this: The freezing of your bank account. This can occur without any further court visits by anyone. The judgment lets the lawyer send what’s called a restraining notice to a bank, which freezes up to twice the amount owed. This cuts off access to the funds in the account. With an information subpoena, the lender’s attorney tells the bank to copy all the information they have on the account and send it in.

Fourth risk: The levy can come any time. The lawyer can send an execution notice to the sheriff at any time the judgment is in force, and your bank accounts can be swept for the judgment amount. These levies can start, stop, and start again, at any time until the judgment is paid off or erased by a court.

Fifth risk: The debt grows and sticks. In New York, business judgments draw 9 percent a year, so a debt can grow fast. The judgment is a lien on real property owned by the business in the county it was docketed in for 10 years. If you signed a personal guaranty, the creditor could go against your own accounts and property.

Sixth risk: judgment is hard to undo and lasts for 20 years. After that it is presumed paid off. Partial payment starts that clock running again. Once you have a default judgment against you, your opportunity to fight the debt has drastically narrowed. What you get instead is the right to fight to have the judgment vacated or lifted. One route is a motion to “vacate” (take out) the judgment for “excusable default”. You get only one year to file that kind of motion after you are served with the judgment and notice of entry. Improper service can be grounds to vacate, but such challenges should not be delayed.

Respond in a Timely Way

Respond in a timely way, and consider hiring a lawyer. Do not sign anything you are given by anyone at this point. Gather up the MCA contract, bank statements from the last 90 days showing how payments were made, and anything written from the lender asking for payment before the lawsuit. See if you can find a confession of judgment or arbitration clause in any of the papers you signed.

These clauses matter because they change the kind of help you can get from a lawyer. A confession of judgment clause lets the creditor get a court judgment without any lawsuit or advance notice. New York bans filing a confession of judgment against non-New York residents. Texas treats a confession of judgment in covered MCA deals as unenforceable. Confirming an arbitration award turns it into a judgment, as good as if you’d lost in court.

Don’t start a new company and try to move accounts to it. Starting a new company for the purpose of avoiding a judgment can be treated as a “fraudulent transfer”. Never tell a bank authorized debits were unauthorized.

When a business files for bankruptcy, an automatic stay generally halts most collection efforts. Be careful however; the business filing does not automatically put off debt that a personal guarantor like you owes. This is a big decision, with strong positive and negative effects on many fronts.

Negotiated Agreements

Lawsuits tend to end up with negotiated agreements. These agreements generally will have terms like a payment reduction, a longer time to pay off the debt, and a promise to cancel any liens against the property. Any amount of debt that is reduced or forgiven is generally considered taxable income by the IRS. However, there are some exclusions. As with most complicated questions, talk it over with your accountant or tax preparer.