MCA Debt Relief Options in New Jersey

Depending on the size of your debt and the MCA debt relief services you choose, you can reduce your daily, weekly, or bi-weekly payments. You can stretch out the term. You can negotiate with the funder to lower the total debt.

If your business can’t pay a merchant cash advance, you have a few options. You can submit a reconciliation request or try to negotiate with the funder directly. You can consider business debt restructuring or reverse consolidation. In some circumstances, bankruptcy can be a viable way out. Business debt restructuring can reduce payments on an MCA without taking out a new loan, but may cost fees and potentially lead to lawsuits.

Recharacterize a Merchant Cash Advance as a Loan

Merchant cash advance is usually not a loan. It’s actually just the purchase of future receivables. So state usury laws usually don’t apply, and reconciliations have to be negotiated via the contract.

Depending on the circumstances, courts will sometimes recharacterize a merchant cash advance as a loan if repayment was found to be absolute. The criminal usury cap in NJ is 50% a year for corporations and 30% for others.

In January 2023, the New Jersey Attorney General announced a $27.375 million settlement with Yellowstone Capital. The settlement resolves claims that merchant cash advances were disguised as loans, and that some borrowers were charged illegally high interest rates. That settlement also forgave about $21.75 million owed by New Jersey customers of Yellowstone companies, and pending collection lawsuits against them were dropped. But beware: personal guarantors of business debt should be cautious about raising a usury defense. In one case, the New Jersey bankruptcy court held that while an 83% lender would commit a crime, the usury defense was not available to the guarantor of a corporate loan.

Stopping Payment

You can just stop making the daily payments on your merchant cash advance, but the MCA funder may take legal action against you. Instead, read your contract and look for the reconciliation clause. Ask the funder for an adjustment in writing. Send the MCA funder bank statements, financial reports and other documentation that show you haven’t been bringing in as much as you were. Before stopping payment, switching banks, or revoking an ACH authorization, you should talk to a lawyer.

If you default on a merchant cash advance, the funder may tell your customers to pay them directly or interfere with your card processing. The funder may file a lawsuit, perhaps in New York, and they may try to enforce a personal guarantee. After winning a judgment, the funder can freeze your bank accounts. Personally guaranteeing an advance means that the funder can sue you personally. Generally, personal guarantees only trigger if you breached the contract, like by diverting business funds away from repaying the advance. If the business just failed in good faith, they may not trigger. The effect depends on the language of the contract and the court.

New Jersey law now prevents commercial lenders from requiring a confession of judgment in contracts with New Jersey businesses, cash advances included. New York stopped filing COJs against out-of-state debtors as of August 2019.

Chapter 11 Bankruptcy

If a lawsuit or an account freeze seems likely, that might be a sign to consider bankruptcy. You can file a Chapter 11 bankruptcy and then submit a plan to be approved by the court. Under Subchapter V, you’ll have 90 days to file your plan, though the court can extend that if any delay wasn’t your fault. Confirming a plan usually takes several months.

Out of court, and for a single-funder debt, you might be able to resolve things through reconciliation in a matter of weeks. Either way, watch out for the taxes. Settling a debt for less than you owe is usually treated as a windfall. That makes the forgiven amount taxable income. But insolvency, bankruptcy, and other exclusions may apply. See IRS Form 982.

Business debt restructuring usually won’t hurt personal credit scores, since most MCA companies don’t report to consumer credit bureaus. But a judgment on a personal guarantee can, and so can an individual bankruptcy. Business credit reports may show UCC filings and judgments.

Consolidating is not the same as restructuring. Restructuring means renegotiating the terms of your existing merchant cash advance without taking out a new loan. But while the terms can vary, MCA consolidation usually does involve a new loan, and the total cost of repayment may be higher than without consolidation.

It’s OK to hire people to help you restructure debt, including business debt like MCAs. But they should tell you all fees upfront, they should include licensed attorneys, and they shouldn’t ask for payment before getting results when the state forbids it. You can file complaints with the New Jersey Division of Consumer Affairs online or request a form at 1-800-242-5846.

The bottom line is that your goal in settling an MCA should be to get on a payment schedule you can actually afford. And that starts with your contract and the reconciliation clause.