Stopped Paying an MCA a Year Ago: 5 Questions Before Treating the Silence as Closure

You stopped payments on your merchant cash advance about a year ago. The funder has never called or sent a letter, and nobody seems to have gone to court. You might think the loan is officially forgotten about, but silence is not closure. For the next few years, funders can still try to start a lawsuit, and something may already have been filed that you don’t even know about. You need five questions answered to tell if it’s over. This piece will walk you through them.

The Judgment You Didn’t See

The first thing to understand is that the MCA funder may have already filed a judgment against you, and may even have the power to do so without you knowing. If the business was based in New York and signed a confession of judgment, the other side can turn that into a judgment any time within 3 years after you signed it. But there’s a but. New York stopped allowing confessions against people and businesses who did not live there in 2019. Now, the law lets them be filed only where the defendant lives or has a place of business. This is the kind of complication that local counsel is for.

The other route to the judgment you didn’t see is arbitration, a way of resolving a dispute that doesn’t involve the courts. New York’s Attorney General sued Rapid Ruling, a provider of arbitration services to MCAs, alleging that only 3% of its roughly 3,000 cases over 3 years resulted in a representative for the business showing up. Funders could then turn the results into court judgments.

If such a judgment is brought to Texas, filing an out-of-state judgment there is both a lawsuit and the final judgment. There, a 30-day window to file a motion for a new trial runs from the filing of the judgment. In many of these cases, waiting for a bank freeze may be too late.

Statute of Limitations

The second thing you need to know is that the funder still has a lot of time to sue you, and that it may be a lot more than you think. Even though you may not be in New York, and your bank account may not be, the funder may be, and many MCA contracts choose New York law. There, breach-of-contract lawsuits get 6 years. Even in other states, the standard may be as much as four years, as in Texas. In either case, you may feel like you’re in the clear after one year, but if the funder’s chosen state is New York, you have only used up 1/6 of the time available.

Third, a little communication with the funder can make a big difference to how much time it has left to start a lawsuit, but it will be what you put on paper that makes the most impact. In New York, for example, a signed written acknowledgement or promise to pay extends the time the funder can bring a breach-of-contract case. Be careful what you sign.

Fourth, be aware that a judgment in your name stays in force for a while. In New York, it’s presumed to be paid only after 20 years, but any payment, including the levy of your judgment, will restart that clock. It also carries 9% interest a year, a number that will add up.

Finally, with MCAs, there is the UCC-1 lien. It generally lapses after 5 years, although a “continuation” filed in the 6 months before expiry can keep it going. Whatever you get in settlement, make sure you also get the termination of that lien.

Silence isn’t forgiveness for tax purposes either. Canceled business debt is generally taxable income, with some exceptions like bankruptcy and insolvency. It’s reported on Form 1099-C when at least $600 is involved, and when it’s “forgiven” by a bank or business that lends money for a living. For the usual exclusions, you’ll need to fill out Form 982. Even a passed deadline to sue (the statute of limitations) isn’t “canceled debt” under the Form 1099-C rules until a court’s final decision says so, and all appeal time runs out.

Check the Court Records

With all that in mind, the first thing you should do is to make sure that the funder’s quiet isn’t an early move in a legal game. Check the court records to see if anything has been filed. Also check out the UCC filings that would attach to the business for any sign that one was filed by your lender. Reread the contract, too, and check its reconciliation clause. Does it have a finite term? Does it have a source of recourse if you were to file for bankruptcy? Is it really a loan at all? A 2020 New York appeals court said courts usually weigh those three factors to decide whether repayment is absolute, which would make it a loan. Once you know those answers, you will know how strong a position you have.

If it’s a loan, New York treats knowingly collecting over 25% a year as criminal usury. That’s leverage to negotiate a settlement on a lump sum or reduced payments, with a written lien termination and dismissal thrown in.

Whatever the reason for the silence, things can flare up again, so act while you have the chance. Whenever any papers do finally arrive, the first thing you should do is answer within their deadline, no matter what your first impulse is.