When a small business owner defaults on one or more merchant cash advances (MCAs), it is likely that the alternative lender will use the collections methods permitted under the Uniform Commercial Code (UCC) and file a lawsuit in a state favorable to MCA companies. When small business owners are sued, most are unaware of the seriousness of the situation. In fact, over 90% of small business owners who are sued do not respond to their lawsuits and eventually end up with a judgment. Once a judgment is obtained, the alternative lender will attempt to collect your debt by any means necessary. This article discusses several important aspects of judgments, what alternative lenders can and will do to you, and some steps you can take to avoid the risks associated with a judgment.
Thomas Tramaglini, Chief Operations Officer
Partner, Center for MCA Research
Default on a cash advance or an alternative loan? Chances are you will get sued.
When a small business owner defaults on an alternative loan or merchant cash advance (MCA), most or alternative lenders regardless of the situation view you as a crook. Soon thereafter they will sue you.
This is the bottom line:
So, understand the following is absolutely true (by most alternative lenders).
They do not care if you are emotionally or financially ruined.
They will do whatever they can to take all any assets (some illegally) they can get their hands on from you.
They are not your friends do not care if you suffer.
What is a judgement from an alternative lender or MCA company?
A judgment is essentially a court decision in a legal case. If you do not respond to a lawsuit, you might receive a judgment that permits the MCA company to start garnishing your funds, seizing your assets, or liquidating your equipment. MCA companies often file lawsuits in jurisdictions outside the business owner's home state, necessitating the hiring of an attorney in that jurisdiction, which can be difficult. This is because the laws in those states generally favor MCA companies. For instance, many MCA lawsuits are filed in places like New York due to the favorable laws for MCA companies there.
For example, in New York, if 30 days pass after serving a lawsuit to an out-of-state business owner, a law firm clerk can go to the court and obtain a judgment order signed by a clerk (not a judge) without prior notice. Without hiring a lawyer, a small business owner who does not respond to the lawsuit risks receiving a judgment, allowing MCA companies to pursue the business and personal assets of the small business owner.
When you get a judgement, in most cases not only do you have a judgement against your business, you likely also have a judgement against you personally.
Most alternative lenders require you to personally guarantee your loan or advance upfront. This means they are likely to sue you personally in addition to your business.
Having a judgment against you can impact you in several ways, such as ongoing harassment, damaging your personal credit, wage garnishment, and making it difficult to secure financing for housing, vehicles, credit cards, and more.
Individuals with judgments should recognize the significance of having one personally—while you can close your business, dealing with a personal judgment is a different matter.
What Happens After a Judgment is Filed Against Your Business by an alternative lender or MCA company?
Once the judgment is filed, the alternative lender will begin attempts to collect your outstanding debt through every possible means.
Some of the efforts include
Filing domestication processes in your home state to seize available assets.
Emailing and harassing you.
Calling and harassing you.
Calling and harassing your customers and vendors.
Harassing you on social media.
Garnishing your wages.
Restraining and recovering money from:
Vendors.
Payroll providers.
Credit Card and ACH processors.
Bank Accounts.
Can I "undo" the judgment from the alternative lender or MCA company?
Once an alternative lender secures a judgment through the legal system, it is generally difficult to have it removed. However, there are situations where the lender may agree to vacate the judgment, which eliminates the judgment but not the ongoing litigation. The team at Beacon and our attorneys have had success in this area.
Judgment Fees and Leverage - What you want to avoid.
When a small business owner is sued by an alternative lender, they face a claim for a specified amount, including damages and legal fees. By responding to the lawsuit, individuals or small businesses can often reduce or eliminate some or all of the damages, penalties, and certain court and legal fees.
However, once a judgment is in place, the costs increase significantly, and any legal defense or leverage is lost.
Therefore, hiring an attorney to respond to the lawsuit is usually more cost-effective than doing nothing, which is a common choice among small business owners.
Once I receive a judgment, can I continue to contest it in court?
After receiving a judgment, there is little that can be done to defend yourself.
However, a professional consultancy working with small business owners who have judgments can collaborate with our legal team to explore any possible means to reopen your case and challenge the judgment. Our team recognizes the difficulty of this task, but our legal team has successfully identified illegal actions taken against you and your business during the process or found issues that could bring the case back to court. Each of our attorneys thoroughly reviews cases, and if we can find a way to challenge the case, we will do so.
Holding Brokers and Defaulters Accountable
In certain instances, unethical brokers can be held partially or fully responsible for actions that led to your default. Neither you nor the cash advance company appreciates brokers who cause you and your business to default. We have written extensively about numerous unethical brokers who have created significant issues.
Negotiating a Settlement Independently - Usually Not Advisable for Most
One option is to contact the creditor to arrange a payment plan, which generally halts the collections process. The challenge with directly reaching out to the alternative loan company or their attorney is that they have a judgment against you, meaning they will likely propose stringent terms that are difficult to meet. Additionally, it's crucial to understand that the collections company and attorney receive a 20-25% commission, and the quicker you pay them, the sooner they get paid.
Keep in mind, collections companies, their attorneys, and certainly the alternative lenders DO NOT prioritize you or your business. Their focus is on receiving payment and ensuring their investors are paid (if applicable).
Can I Get a Discounted Payback After a Judgment?
Once a judgment is in place, you are technically liable for the amount specified in the judgment.
Some alternative lenders and their attorneys might work with you to reduce costs, but it is almost always advantageous to use an attorney or reputable consultant like Beacon Client Solutions, as they already have relationships with creditors, which can significantly impact the reduction of fees/damages and repayment. No alternative lender with a judgment is obligated to decrease the judgment amount.
Bankruptcy
Filing for bankruptcy is a common consideration among clients overwhelmed by MCA companies. In some respects, it may be beneficial for the client, while in others, it may not be.
Here are some factors to consider if you choose to file for bankruptcy:
If you file for bankruptcy, most individuals will need to file both business and personal bankruptcy.
Bankruptcy may discharge your debt, but it does not eliminate judgments.
Depending on your state, judgments can last from 5 to 20 years. Therefore, while you may think you are alleviating your debt, you will still have to contend with a judgment on your record.
Threatening bankruptcy might also serve as a negotiation tool. However, if you intend to threaten bankruptcy, you should be prepared to follow through, as it could backfire if not executed.
Addressing your Debt the Right Way.
If you're looking to manage your debt, experienced consultants such as Beacon and our legal team are prepared to assist you in fulfilling your obligations in an acceptable manner.
We aim for you to keep operating your business and enjoying life, which involves handling your alternative loan and advance debt in the most cost-effective and significant way possible.
Our objective is to assist you in achieving your goals.
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 Master’s and Doctorates in Organizational Leadership from Rutgers, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accounting firm or a law firm. We specialize in business consulting. Although we collaborate with exceptional lawyers and accountants, we are not authorized to offer legal or tax guidance. Our services are closely linked to professionals who hold the necessary legal certifications. With extensive experience in MCA resolution, Beacon Client Solutions comprehends the challenges faced by small business owners, particularly related to MCA. We cater to clients across all 50 states, Puerto Rico, Mexico, and Canada.
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