Criminal Defense Lawyers

Business Debt Settlement

How to Avoid Consequences After a Merchant Cash Advance Default?

The moment your business misses a merchant cash advance (MCA) payment, the clock starts. It’s ticking against you. You need a business debt settlement lawyer to help you in this situation. Defaulting on an MCA isn’t like traditional delinquency—it’s a unique situation that is governed by Uniform Commercial Code (UCC) Article 9 provisions, confessions of judgment (COJs), and aggressive daily repayment structures.  The agreement you signed for the MCA is probably written totally in the lenders favor. You are not getting any help from the agreement. The consequences of an MCA default are immediate: frozen bank accounts, liens on receivables, or even personal asset seizures if you’ve signed a guarantee. But consequences aren’t inevitable. Let’s dissect scenarios, defenses, and laws to navigate this minefield. Business debt settlement is something we can do to help.

Scenario 1: Defaulting with a Confession of Judgment (COJ)

You signed an MCA agreement which contains a COJ—a legal clause allowing the lender to obtain a judgment without notice if you default. In New York, Pennsylvania, and other states permitting COJs, providers can drain your accounts overnight.

Strategy 1: Challenge the COJ’s Enforceability

• Grounds: Was the COJ executed improperly? In Advance v. Smith (2022), a New York court voided a COJ because the lender failed to attach a signed affidavit to the filing. This is something we can use to help you.
• Action: File an Order to Show Cause to stay enforcement. Argue the COJ violates due process (e.g., lack of notice) or contains procedural defects (e.g., missing notarization).

Strategy 2: Negotiate Post-Default
Lenders always prefer repayment over litigation. The act of litigating is costly – and the lender knows, that even if they win – that is no guarantee of getting compensation. You can file for bankruptcy. Offer a lump-sum settlement (30-50% of the balance) – funded by refinancing or asset liquidation. Cite IRS Code § 108: Settled debt may count as taxable income, but exceptions exist for insolvent businesses.

Scenario 2: Stacked MCAs & the Debt Spiral

You took a second MCA to pay the first, and now the daily withdrawals consume 30% of your revenue. Under UCC § 9-607, lenders can place UCC-1 liens on receivables, this makes it impossible to secure new financing of any sort at all.

Strategy 1: Consolidate via Ch. 11 or State Law

• Bankruptcy: Ch. 11 halts collections and lets you reclassify MCAs as unsecured debt. In In re Deli Corp (2021), a Court allowed a restaurant to discharge $300k in MCAs by arguing they were disguised loans – and this helped the business survive.
• State Remedies: California’s SB 1235 caps small business loan rates at 36% APR. If your MCA’s factor rate exceeds this, sue to void the contract under usury laws. This is something we can do to help you get out of predatory MCA loans.

Strategy 2: Leverage Cash Flow Realities
Provide lenders with 6 months of bank statements showing unsustainable withdrawals. Propose a payment pause or term extension under UCC § 9-624, which allows debtors to redeem collateral by paying 115% of the advance post-default.

Scenario 3: Predatory Terms & Usury Violations

MCA contracts often mask APRs exceeding 100%. In Kramer v. Funding (2023), a New York court reclassified an MCA as a loan, triggering usury penalties under NY Gen. Oblig. Law § 5-501.

Strategy 1: Usury as a Defense

• Factor Rate Math: A $50k\; advanceata1.4factor\; costs$70k over 6 months = ~150% APR. If your state’s usury cap is 25% (e.g., Arkansas), the contract is void.
• Discovery: Subpoena the lender’s underwriting docs. If they used credit scores or fixed repayment terms, courts may deem it a loan.

Strategy 2: Sue for Unconscionability
Argue the MCA’s terms shock the conscience (Williams v. Walker-Thomas Furniture, 1965). For example, a 200% APR for a struggling bakery during COVID-19. This is a credible defense that works in certain jurisdictions.

Tax Bombshells & Long-Term Fixes

Settling $100k+ in debt? The IRS may treat forgiven amounts as income (IRC § 61(a)(12)). This is something we can work with you on when dealing with business debt settlement implications.

Here are some Exceptions:

1. Insolvency: If liabilities exceed assets, exclude canceled debt up to the insolvency amount (IRC § 108(a)(3)).
2. Bankruptcy: Discharged debt isn’t taxable.

Post-Settlement Rebuilding

• Debt Consolidation Loans: Refinance via SBA 7(a) loans (10-year terms, ~10% APR).
• Vendor Negotiations: Convert past-due bills into long-term payment plans to avoid liens.

How Delancey Street Approaches MCA Defaults and Business Debt Settlement

Our team—led by Steven Raiser, a former JAG Corps attorney—uses a two-pronged legal

strategy:

1. Legal Defense:
   • Challenge COJs and UCC liens.
   • Sue lenders for usury/TILA violations.
2. Financial Restructuring:
   • Negotiate settlements using forensic accounting to highlight lender overreach.
   • Structure IRS-compliant repayment plans to minimize tax fallout.

In Matter of Client X (2023), we voided $650k in stacked MCAs by proving the lender’s factor rate equated to 89% APR—violating Connecticut’s 12% usury cap for commercial loans.