MCA Debt Relief Options in California

If you’re a California business dealing with collections on a merchant cash advance, the options available to you depend on how far the funder has gotten, but there are exits at almost every stage. You can negotiate a deal out of court. Funders here have to follow the laws, and using the protections as leverage can sometimes prompt them to settle. Responding to a lawsuit or levy gives you leverage in return, because if you don’t, the funder could win big by default. And there is Subchapter V bankruptcy, which looks and sounds forbidding but can be a powerful tool for a business that has been bogged down by its debt.

The Seizure of Money from Your Account

When a levy hits your bank account, it’s not the first or even second thing to happen. Usually it comes toward the end of a process that starts with missed payments, turns into a lawsuit, and builds to a judgment and writ of execution. The judgment often happens by default when people don’t respond.

It may look like your bank account has been frozen or locked up, but the seizure of money from your account is generally not something a merchant cash advance funder can do on its own. They need a judgment, a writ, and official action by the sheriff or a registered process server to execute a levy. What looks like a freeze may also just be aggressive ACH withdrawals.

Since the new law on January 1, 2023, confessions of judgment are no longer enforceable in California courts, though judgments entered before that date are not covered. But now judgments have to happen the way they should - in a real court. Disclosure rules covering merchant cash advances have changed to let California business borrowers see more clearly what they’re getting into. Deals over $500,000 can be exempt from disclosure rules in some cases. Since October 1, 2023, California law has barred unfair, deceptive, or abusive practices in merchant cash advances. You can file a complaint with the California Department of Financial Protection and Innovation (DFPI) online, through its website. California’s unfair competition law and false advertising law are often raised in disputes over merchant cash advances. Neither of these laws automatically voids an MCA contract or cancels a levy, but both shape what a court’s going to do with the case.

A bank levy locks up the money in your account. Depending on what got hit, some of those funds may be exempt, and you may be able to file a claim of exemption for their return. A claim of exemption should generally be filed with the county sheriff within 10 days of the levy, plus 5 days if notice was mailed. Whether funds can be exempt depends on their nature, the type of account, and how you can trace it. The wrong form or no form, an incomplete form, or a late one can defeat the claim. The funder may contest your claim in a hearing. If you didn’t respond to the lawsuit, it may have resulted in a default judgment, and you may be able to challenge it with a motion to set aside.

A Settlement

Negotiating with the funder always starts with leverage, and in this situation, most of yours comes from looking at the contract itself. Is your arrangement really the purchase of future receivables, or is it just a loan? Did the funder follow the reconciliation clause? Did the funder make all the necessary disclosures? The answers to these questions may not stop a levy dead in its tracks, but they can change the conversation. Under Senate Bill 666, which took effect January 1, 2024, funders cannot charge small businesses a fee for a payoff letter. A small business is a California-based business with 100 employees or fewer. If a funder still charges you for a payoff figure, you have a right to sue for actual damages and up to $2,500, plus attorney fees.

A settlement may end your funder’s claim against you, but it can open a new question: tax. Canceled debt is ordinarily treated as taxable income, though there are exceptions to that. Fortunately, you can use Form 982 to exclude debt canceled in bankruptcy or while insolvent, up to the extent of your insolvency.

If no deal is possible, your business may be able to file for bankruptcy under Subchapter V. It’s open only if the total amount owed on the filing date is $3,424,000 or less. Congress has passed H.R. 7730 to raise the cutoff to $7.5 million. It’s worth checking Congress.gov to see if H.R. 7730 has been signed. Subchapter V is meant to be fast, and it is, with time limits set into it to make sure it keeps moving: the plan must be filed within 90 days, extended only if the delay was not your fault. The filing fee in the Central District of California is $1,738.

Pull Together Every Document You Can

Your first week is for information. The more you know, the better you’ll be able to see your choices. Read all the bank notices and the court case notice (if there is one), noting every fact: the case number, the court, the filing date, the parties, the bank where funds were seized, and the Writ of Execution (the paper telling the sheriff to act on the judgment). Next, pull together every document you can: the written contract and bank statements. Know where deposits came from, and why. Order a UCC-1 financing statement search from the California Secretary of State to learn if there were any documents filed against your assets. A lender filing a UCC-1 financing statement in your business name may feel frightening, but it’s important to know what it means - and what it doesn’t mean. It isn’t a levy, and it can’t take money from you directly, though it can affect any refinancing, so the funder may use it as leverage in settlement talks.

Each of the steps above has its own deadline, and more than one may be running at a time. That’s why one of the most important steps is to get the whole stack of paperwork, the lawsuit, the contract and the levy in front of someone who can spot the deadlines and see the steps needed to meet them. Staying in business means keeping all your choices open - and that depends on taking the right steps.