Did you ignore your MCA lawsuit? Think twice as you DO NOT want a judgement.
- Thomas Tramaglini
- 6 minutes ago
- 5 min read
When a small business fails to repay a Merchant Cash Advance, MCA companies will take steps to recover their money, including filing a lawsuit in a favorable location, such as New York. However, few MCA lawsuits receive a response. In fact, based on NY Court data, we estimate that 9 out of 10 MCA lawsuits go unanswered. When a lawsuit is not addressed, the small business owner essentially submits to the consequences, which can include wage garnishment and asset seizure by the MCA company.
This article explores the consequences of not responding to an MCA lawsuit and the advantages of responding, even if you feel there is no solution available.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
Despite it being unwise, many small business owners either ignore or deliberately choose not to respond to lawsuits from MCA companies.
Annually, thousands of small businesses face lawsuits from Merchant Cash Advance companies for defaulting on their advances. Our data, collected over a seven-year span, reveals that around 1,100 lawsuits are initiated each month by MCA companies in New York State (New York State Court System). Additionally, an average of 521 MCA lawsuits are filed in other states during the same timeframe (Unicourt). Most MCA companies opt to sue both the small business and the owner personally to recover their losses. The data shows that nearly 91% of small business owners do not hire an attorney to respond to and contest these civil actions, leading to a judgment.
Judgments can be extremely harmful, affecting business owners and their businesses for many years.
What is an MCA Judgment?
A judgment is simply a court order that resolves a lawsuit. If you fail to respond to your lawsuit, you may easily receive a judgment, enabling the MCA company to garnish your funds, seize your assets, or liquidate your equipment. MCA companies often file lawsuits in jurisdictions that are not the business owner's home state, requiring them to hire an attorney in that jurisdiction, which can be challenging. These states typically have laws that favor MCA companies. For example, many MCA lawsuits are filed in places like New York because the laws there are advantageous to MCA companies.
In New York, 30 days after a lawsuit is served to an out-of-state business owner, a law firm clerk can go to the court and have a clerk (not a judge) sign an order for a judgment without notice. If a small business owner does not hire an attorney and fails to respond to the lawsuit, a judgment will be issued, allowing MCA companies to pursue the business owner's business and personal assets. Other states, like Florida, only provide 20 days to respond to an MCA lawsuit.
What Can Happen if You Do Not Answer Your Lawsuit and Get a Judgement
1. The MCA companies will collect from your assets and more.
Once an MCA company has obtained a judgment against you, they will start locating and seizing your assets to recover the debt. What assets can MCA companies seize? This may include vehicles, additional properties, jewelry, personal belongings, funds frozen through UCC, and money in bank accounts, among others.
If you reside outside the state where the judgment was issued, states have procedures for domestication that allow judgments to be enforced in the business owner's state, enabling collection efforts to begin. Should the business owner attempt to conceal assets, the MCA company's domestication attorneys can file discovery motions, compelling the business owner to reveal assets for collection.
Here are a few examples of current domestication cases from MCA companies:
***Please note that if a business owner tries to lie or hide their assets from a court ordered domestication procedure they can be subject to criminal action.
2. Impact on Your Business and Personal Credit
When you receive a judgment, most MCA companies or their collection agencies will report it to the credit bureaus. This can negatively affect both your business and personal credit. Additionally, MCA lawsuits become part of the public record, which can be harmful, especially when your background is checked for activities like renting or buying a house, starting a new business, or other similar actions. Ultimately, you cannot conceal the judgment.
3. Difficulty in Future Borrowing
Many individuals with a judgment believe they can simply start a new business or ignore the judgment. However, regardless of the steps taken, they will face challenges in borrowing money in the future. Not only does the business owner default on an MCA, but they are also likely blacklisted by MCA companies. Moreover, the judgment will affect underwriting and risk management, making it extremely difficult, if not impossible, to secure loans.
This includes borrowing money for:
Real Estate
Cars
Business
SBA loans
Factoring
Credit Cards
4. You will struggle to open bank accounts and secure new credit card processing.
Some small business owners with judgments may attempt to keep their businesses running or even start new ones. However, when they try to open new bank accounts or secure new credit card processing services, financial institutions are often hesitant to engage with them due to the risk of account freezes or judgment enforcement. Many credit card processors outright refuse to work with business owners who have judgments.
5. You will continue to be harassed.
If small business owners have defaulted on MCAs, they have likely faced harassment. No matter which MCA company is involved, once a judgment is obtained, the following will persist:
You will continue to receive calls, emails, and texts regarding your debt.
Your customers will also keep receiving calls, emails, and texts about your debt.
Your existing UCC lien will be enforced.
There may be postings about your judgment on social media, your website, or other sites (such as the Better Business Bureau).
What does legally responding to the lawsuit do?
When sued by an MCA company, it is important to respond. (We have several posts detailing what to expect and how to proceed).
However, do not try to handle the lawsuit on your own. In states like NY, businesses are required to have an attorney respond to the lawsuit.
Responding to the lawsuit prevents the MCA company from easily obtaining a judgment, which simplifies collection. By responding, you demonstrate your intention to defend yourself and your business against a judgment. Most MCA lawsuits that receive a response do not result in a judgment because clients can rely on attorneys and our advisors, who are skilled at protecting clients and their businesses, ultimately achieving a favorable outcome.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.