What happens if I default on a merchant cash advance?

The default machinery, in order.

An MCA is structured as a purchase of future receivables, not a loan - a distinction the industry built to dodge usury law. Miss remittances and the agreement’s machinery engages: default interest and fees stack; the funder files UCC-1 liens on your receivables and notifies your processors and key customers to redirect payments; accounts get frozen through restraints; and where the deal included a confession of judgment (banned for out-of-state debtors in New York since 2019, but still used elsewhere and in older deals), the funder converts your signature into a judgment without a lawsuit. Personal guarantees put your house and accounts behind the business’s obligation. The speed is the point - funders move in days, not months.

The defenses funders hope you never raise.

The recharacterization fight: if the “purchase” functions as an absolute-repayment loan - fixed daily payments regardless of receivables, no true reconciliation, personal guarantees of performance - courts have treated MCAs as loans subject to usury caps, and New York’s criminal usury line (25%) has voided deals whose effective rates ran to triple digits. Reconciliation breaches: most agreements promise payment adjustment when revenue falls; funders who refused reconciliation breached first. UCC and restraint overreach: freezing exempt funds and third-party money generates counterclaims. And COJ challenges: procedural defects, jurisdiction, and the 2019 New York amendments unwind judgments entered on autopilot. Merchants also carry FDCPA-adjacent and tortious-interference claims when funders contacted customers with false statements.

The criminal edge to watch.

Two directions. Funder conduct: the industry has drawn prosecutions - fraud and criminal usury theories against funders whose collection tactics crossed lines. And merchant conduct: what owners do in the panic - moving receivables to new entities to dodge liens, opening parallel processing under a relative’s name, misrepresenting revenues on the next application - converts a civil default into bank-fraud and creditor-fraud exposure. The rule: defend the default with counsel, not with self-help that reads like concealment. If agents are already asking about your applications, the matter has changed lanes - treat it that way.

The playbook this week.

Read the agreement (reconciliation clause, COJ, guarantee scope). Stop the informal promises to funders’ collectors - everything said gets quoted. Inventory the freezes and who was contacted. Then negotiate from the defenses: recharacterization and reconciliation leverage produces settlements at meaningful discounts, structured over time, with releases of the guarantee. Owners who move early keep businesses; owners who wait meet the marshal. The consultation is free - bring the agreement and the account statements.

THE AUTHOR

Todd A. Spodek

Managing partner. Second-generation federal defense lawyer - the Netflix defense, the Fox and CNN analyst chair, and two decades of federal courtrooms.

Meet Todd →