7 Things to Do in the First 48 Hours After an MCA Freezes Your Bank Account

If a funder froze your bank account, you almost certainly have a judgment, whether or not you’ve seen it. Your bank likely received a notice requiring them to freeze any assets they hold for you, without notice to you, and the bank must act immediately. The freeze can end by negotiation, court action, or payment. But your ability to solve this from negotiation or court will weaken over time, the longer you wait.

1. Get the bank paperwork

Even though the bank didn’t have to notify you of the freeze, they are the key to figuring out who the creditor is and how much money you owe. Simply ask your bank for the “restraint paperwork.” It tells you the creditor’s identity, what court entered judgment, the date of entry, and the amount owed. After you have those four pieces of information, you have everything you need to make a plan. This plan will either mean fighting, or negotiating. But for either, first, you need to know who you’re dealing with.

2. Know what a restraint does

A restraint notice is not automatically a turnover. In fact, it doesn’t transfer your money at all. A restrained account is frozen; but this does not usually mean it’s emptied into the creditor’s hands just yet. A restraint is just the first step, and those frozen dollars can still be your bargaining tool - because sending that money to the creditor would require them to take another step.

In New York, your bank can restrain up to twice the amount of the judgment owed. If you have more than that in the bank, those dollars will stay untouched. A restraint notice doesn’t last forever, but the expiration date isn’t something you should rely on. That notice lasts for one year unless the judgment is paid or vacated first. The real clock isn’t the life of the notice, it’s the moment the bank takes the next step.

3. Warn your payroll provider

Before the next payroll run, even if you think you can clear the freeze in time, tell the provider that the account will not work. Payroll providers prefer to see this coming, too. If you don’t notify them, their systems will attempt to run the payroll as scheduled. A frozen payroll account is not just an administrative hassle; it’s the start of a legal nightmare. Payroll and payroll taxes are at the top of the list of critical expenses to keep up, and since you can’t keep up by paying through a frozen bank account, you have to look for another way.

Still, it’s not all bad news - some kinds of money in a frozen account can’t be collected this way, depending on its source and your state.

4. Don’t move money in a panic

Your MCA contract likely requires you to put all business revenues through the same account you applied with, so switching can count as a default. The more accounts the creditor finds, the more accounts they can freeze. In some circumstances, rapidly moving assets could be seen as a way to hide them. Moving money out of the business can count as a fraudulent transfer, and this can have personal consequences for you. Bridging operations is a real need, but there are lawful ways and unlawful ways to do it. Talk to a licensed attorney about your situation.

5. Look for grounds to fight it

Not all judgments will stand up to scrutiny, so before negotiating, call a licensed lawyer to see whether this judgment can be defeated. Your attorney can ask the court that entered the judgment to “vacate” it; or at least limit the restraint. The court can vacate or limit a judgment for a few reasons: improper service that broke the rules; procedural defects or errors in the paperwork or how the judgment was entered; exempt funds; or restraints beyond what the court is allowed to seize.

In New York, if you want to vacate a judgment for “excusable default,” your application to the court must be made within a year after the judgment was served with notice of its entry. If you have grounds other than excusable default, like fraud, misconduct or lack of jurisdiction, the rule sets no time limit on your application.

New York courts also find that some MCA transactions are really contracts for loan, not for the sale of future receivables. Courts weigh a few factors: whether there is a reconciliation provision, finite term or recourse if a merchant goes bankrupt. Call an attorney to discuss this further if you believe this applies in your situation.

6. Talk to the creditor

Judgment creditors routinely negotiate partial releases, and they’re even more likely to do it when payroll is at stake. They know as well as you do that bankrupting the business does nothing for them. So be prepared for a challenging conversation, but talk to them anyway. Put every step in writing. A settlement, perhaps with a partial payment, usually ends with a release signed by the creditor. This road is often the most common and fastest, though results vary, and nothing’s guaranteed.

7. Plan past the freeze

If none of these steps work, this may lead to bankruptcy. Filing immediately stays almost every enforcement of judgments and collections of debts. There’s a federal fee to file for Chapter 11 bankruptcy, and it currently costs $1,738; it may also be wise to have an attorney help with your paperwork.

A freeze is usually the last stage in a long, difficult process, and spotting the first clues is key to stopping the next one. That means answering every legal paper by its deadline, using your reconciliation rights in writing when revenue drops, keeping your funders in the loop on everything, and finding an attorney to assess all of them together.