What Happens if a Funder Refuses to Settle Your MCA Debt?

If the MCA lender refuses to settle, the advance you received doesn’t go away. Since they have no incentive to settle, they may move faster than you expect, securing a confession of judgment, freezing bank accounts, sending letters to your customers, and hitting anyone who signed a personal guaranty. What you do before they act on this is key. If you have no way to pay the loan, then this may be time to get a lawyer and challenge the contract.

A Judgment Can Be Taken Against You

In New York, the MCA funding agreement you signed likely came with a confession of judgment. That means you signed an affidavit agreeing that a judgment can be taken against you without a lawsuit or hearing in court. When the funder files the affidavit with the county clerk, it’s as if you’ve already been sued and lost. The clerk simply enters a judgment for the amount in the contract, plus $15. They can do this up to three years after you signed the document.

Since August 30, 2019, a New York confession of judgment can only be used against debtors residing in the state. For businesses, residence is wherever they have an office. In March 2024, the NY Attorney General’s office filed suit against Yellowstone Capital, an MCA lender. The AG’s office charged that Yellowstone Capital had cheated businesses outside of NY by using their confessions to get money from bank accounts, even though the confessions weren’t allowed for out of state borrowers. The federal government (The Federal Trade Commission) has also gotten involved. In June 2020, the FTC filed a federal case in New York against other MCA funders over alleged use of confessions of judgment against New York and other state debtors’ personal and business assets.

In Pennsylvania, the MCA funder files a complaint with the prothonotary (essentially, a clerk of the court, where most civil actions are filed). The funder doesn’t have to show a court order. It only needs permission if the promissory note is over twenty years old, or a signed copy can’t be produced for the court.

After a judgment is entered against you, the MCA lender can serve your bank (or other financial institutions with funds in your name) with a restraining notice. The notice stops you from taking out money. The bank has to freeze twice as much as the judgment says you owe. Once it has that much, it can’t freeze any more. The money stays in the account for one year, or until the judgment is paid or set aside by a judge. If only part is due, only enough to cover it is executed.

While most lenders need a judgment to take money from your customers (or force them to pay the lender directly), merchant cash advance funders have another option. If the lender takes a UCC lien on your accounts receivable, they can file a notice to your customers saying that they have to pay the lender directly. Once your customer gets this notice, it’s required to send payments directly to the funder until the balance is paid. No court order or judgment is needed to send the notice or for the customer to comply. Your customer can ask the funder for proof of the assignment. Until they give it, the customer can pay you like usual.

If there’s no confession of judgment, the funder can still sue you under contract law. In New York, a company has six years to file this kind of suit. Personal guaranties make debt your problem. Anyone whose assets are subject to the guaranty is a target for the funder, meaning that your bank accounts and personal assets aren’t safe. Most of the protections for you as a consumer do not apply to business debt collection, even if you personally guaranteed the loan.

Those guaranties multiply with stackers, brokers who sell your file multiple times. Each time, you or a partner has to sign a separate contract with a personal guaranty. These “stacked” advances usually work like the first one, but you now have three, five, or even nine different lenders taking out cash from the same receivables every week. When the funder says “reverse consolidation,” it sounds like you’re taking money away from the advance, but it’s just another one. If you’re taking advances just to cover weekly payments, you’re already past the point of insolvency.

The Servicer’s Payment History

The funder’s ledger shows what they say you owe. Make sure their numbers match yours. Pull each bank statement and go through it. The lender may have its own system of double fees and split debits, or treat bounced checks as payments still due. Make the funder show you all the details of the numbers. Look at the difference between the amount wired to you and the amount shown on the face of the contract. That’s the fee. Also, see if you’re really making daily payments, even though the contract requires weekly ones. The week may be split into daily hits. Ask them to list every single hit to your bank account, whether or not it succeeded, with dates. Use the report to see if you’re really making double payments, or paying for fees you never agreed to. Dispute any fees that aren’t in the contract.

Look at the weekly payment, and divide the total of the debt by the payment. That gives you the length of the debt, or term. Sales don’t have a term, but loans do. For years, funders could usually get through the summary judgment phase by arguing that the contract is too fact-based to decide in such an early stage of the lawsuit. Recently, judges have seen that as a less valid defense.

In June 2026, a federal judge in Louisiana ruled on summary judgment that the contract was a loan, not a sale of future receivables. There was no trial in Crosby Marine; the judge found the contract a loan without taking testimony from experts. The term of the loan was computed by dividing the amount owed by the fixed payment. Because it was a loan, the advance was not protected from the debtor’s bankruptcy. Also in 2026, a New York bankruptcy judge decided that the contract’s waiver of New York usury law didn’t count, since New York public policy didn’t allow anyone to waive usury. The bankruptcy judge did not say that the debt was usurious, only that the waiver couldn’t be enforced. In January 2026, a Texas bankruptcy court allowed the debtor’s fraudulent transfer and recharacterization claims to go forward, saying that the debtor didn’t have to prove intent.

Send your lawyer every paper in the file, including every single bank statement and all the documents related to the deal (the MCA agreement, addenda, any personal guaranties, confessions, the lender’s copy of the checks). This includes wire transfers for payments and funds received from the lender. If the business borrowed from the SBA or EIDL, that loan’s blanket lien may make the merchant cash advance unsecured.

The federal cases above show why recharacterizing the agreement as a loan matters. In the Louisiana bankruptcy ruling, the funder was no longer a secured creditor. If the debtor shows that the proof of claim is wrong, the lender may not be paid. Bankruptcy also stops the funder from debiting your bank accounts or using a confession of judgment against you.

Subchapter V is a new section of bankruptcy law passed to help businesses with fewer than $3,424,000 in debt. There’s no creditors committee, and no one can file a competing plan. The debtor keeps its equity. Any MCA lender may be treated as unsecured. In 2026, a proposed bill (H.R. 7730) to reinstate the $7.5 million limit passed both houses, but it is not law yet. Count the MCA claims from each merchant cash advance you took. Not every business fits Subchapter V. Chapter 11 is a full-blown reorganization, usually for businesses that are too big for Subchapter V. Companies with no future may do better somewhere else.

The trustee can get back payments you made to a creditor within 90 days of filing. If your company was insolvent during that time and the funder received more than they’d get in a Chapter 7 liquidation, the payments can be undone. If the funder keeps debiting or adds fees after you file, that may violate the automatic stay, but you would have to go back to court for the judge to consider it. If you see one or more debits after filing, let your lawyer know. If you close the business, the automatic stay stops the funder from taking money, but may not protect you as a personal guarantor.

If you get out of any debt for less than what it’s worth, the IRS generally treats the forgiven amount as taxable income. However, there are exclusions. Insolvency is one.

Waiting doesn’t solve your problem with the MCA lender. Every week is another payment lost forever, and a new default judgment can be entered against you. Filing for bankruptcy protects you the same day.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.