Can an MCA funder can successfully freeze your bank account?

Thank you for visiting Delancey Street. The purpose of this article is to discuss whether an MCA funder can successfully freeze your bank account.

The short answer is yes, a merchant cash advance funder can indeed freeze your bank account, but it can’t do it just because you missed a payment. To freeze your bank account, the funder actually needs a court judgment first, or in rarer cases, they need to get an order that was signed by a judge. Once the MCA lender has that, its lawyers can serve a restraining notice on your bank, and what this does is it means that the bank now locks your money in your bank account.

Below in this article, we’ll talk about how the freeze works on your bank account, what the law allows, and what’s changed in the last few years and what you can do if your account has already been frozen.

MCA funder

So first and foremost, let’s discuss about what a MCA funder needs before it can freeze your account. An MCA funder is a creditor, just like any other creditor. A missed payment, a default letter, or a threatening phone call doesn’t give it the power to touch your bank account automatically. It needs one of two things.

• First, the MCA lender needs a judgment. A funder can get a judgment in one of two ways. It can either file a confession of judgment you signed when you signed the agreement, or it can sue you and win in court. Winning also includes winning by default when you don’t answer the lawsuit.

• The second is an order of attachment. That’s essentially a court order which freezes assets before the case is even over. It’s less common and it requires a judge.

If the funder has neither one, there is no legal freeze.

confession of judgment

Now let’s talk about what essentially is a confession of judgment. This is a document that’s included in many MCA contracts. It was very popular pre-2020, but a lot of legal laws have changed since then. You sign it at closing, usually with the rest of your paperwork. It says that if you default, the MCA lender can get a judgment against you without even filing a lawsuit, without going through a proper hearing, and without giving you any chance to defend yourself. It is an automatic judgment.

Typically, the way we see this work is the funder first files it with a county clerk, and the clerk enters the judgment. No judge is looking at the facts. You usually get no notice. It’s a pretty automatic provision. And that’s precisely why so many business owners learn about the judgment only after the account’s been already frozen.

lawsuit and the default judgment

Now let’s talk about the lawsuit and the default judgment. If there’s no COJ, the funder has to sue you. Most MCA contracts usually choose New York law and New York courts, so the lawsuit is going to be filed in New York, even if your business is somewhere else. After you’re served with a lawsuit, you have a limited time to answer, and usually that’s 20 or 30 days, depending on how the papers were delivered.

If you don’t answer, the funder is going to ask the court for default judgment, which is the worst-case scenario. In this situation, the funder has the ability and collection power as if they won a judgment at trial. We’ve seen that business owners who usually ignore court papers hand the funder an automatic judgment it never even has to prove. If you’ve been served, one of the first things we recommend is you respond to it. Don’t put the papers in a drawer.

restraining notice

Now the next thing that comes to mind is the restraining notice, and this is the actual freeze. Once the MCA lender has gotten a judgment against you, its lawyers can serve a restraining notice on your bank under New York law. The lawyer can issue it directly as an officer of the court, and no judge has to sign it. Usually it comes with an information subpoena, which is asking the bank to disclose every account you hold there.

When the bank gets that notice, it has to freeze the funds, legally speaking. It can hold up to twice the amount due on the judgment. So what that means is on a $90,000 judgment, for example, the bank can hold up to $180,000. Anything above that amount, the bank has to leave available to you. For most small businesses, twice the judgment is most of your operating cash, to say the least. And this restraint can last up to one year from the date served or until the judgment is either paid or vacated, whatever comes first.

So a restraint only holds the money in place. To actually take these funds, the funder actually has to go a step further, which is usually a levy through a sheriff or a marshal, or they have to get a court order directing the bank to turn the money over to the lender. So very complicated legal process, to say the least.

order of attachment

Now, there’s some terminology you’re going to run into, for example, the order of attachment. An order of attachment essentially lets a funder freeze assets before it wins the case. The funder has to show the judge a legal reason, like your business being located outside of the state, or evidence that you’re hiding or moving assets, and a bond is usually required. Because a funder can ask for that without notifying you, the attachment can take effect before you even answer the lawsuit.

So often many business owners turn to us because they are now either facing a judgment or their bank accounts have already been frozen. And essentially, if you feel any of these following items impacting your business, then it’s likely you’ve been frozen out. Some funders don’t actually freeze your account at all; they just leave it empty.