Closing the doors does not always close the file. The LLC may be dissolved on the Secretary of State’s website, but many merchant cash advance contracts include a personal guarantee, and a personal guarantee is generally written to continue after the business itself winds down. Funders and their collectors are familiar with this. Within forty-five days of a last ACH bounce, the engagement often moves from a payment problem to a personal collection problem.
The Personal Guarantee Outlives the Entity
A personal guarantee is generally a separate contract from the business obligation. Because it is signed by an individual, it is typically written to remain in effect even after the operating LLC dissolves. When the funder no longer has a business to debit, collection efforts commonly shift to the guarantor personally. That can mean demand letters at a home address, calls to a cell phone, and in many cases a lawsuit naming the individual within sixty to ninety days. Whether a particular guarantee applies is a question for a licensed attorney.
If the MCA agreement also included a confession of judgment, a funder may seek to enter judgment directly in a court that accepts COJs rather than filing a conventional lawsuit. Such a judgment can then be domesticated in another state and used to pursue personal accounts. How a specific COJ would be handled is a legal question for a licensed attorney.
Closing the LLC without addressing the personal guarantee is one of the most expensive mistakes a small-business owner can make. The debt does not die with the entity, and the funder’s leverage actually increases once the business assets are gone.
The Cancellation of Debt Tax Trap
If you eventually settle the MCA balance for cents on the dollar, the forgiven portion is generally treated as cancellation of debt income under IRS rules. A $200,000 balance settled for $60,000 produces $140,000 of phantom income on a 1099-C. That can wipe out the relief you just bargained for.
The insolvency exclusion under IRC Section 108 is the lifeline. If your total liabilities exceeded your total assets at the moment the debt was forgiven, some or all of that 1099-C income can be excluded. You file Form 982 with the return for the year the cancellation occurs. The math is mechanical: list every asset at fair market value, list every liability, subtract.
What Collection Actually Looks Like
The order of events after closure is fairly predictable:
- Days 1 to 14: ACH attempts fail, funder calls, demand letters arrive at the business address and then your home.
- Days 15 to 45: File is moved to in-house legal or a specialized MCA collection firm. UCC notices may go to your customers.
- Days 46 to 90: Lawsuit is filed or, if a COJ exists, judgment is entered directly. Personal account freezes begin.
- Days 90 plus: Wage garnishment, liens on personal property, examinations in aid of judgment.
Each stage has a different settlement dynamic. Pre-litigation settlements run forty to sixty cents on the dollar. Post-judgment settlements with active garnishment can sometimes be done for twenty-five to forty cents because the funder values certainty over years of slow recovery.
Negotiating From Outside the Business
The good news, if there is any, is that your negotiating position improves once the business is gone. The funder cannot project realistic recovery from a dissolved LLC. Recovery now depends on your personal solvency, which the funder cannot fully see. Senior advisors use this asymmetry to push settlements down to the floor the funder will accept rather than the ceiling they would prefer.
Documentation is everything. A personal financial statement, recent bank statements showing limited liquidity, and a written explanation of why the business failed all become inputs to the settlement number. Funders settle for less when the file looks bad on paper.
Senior advisors at Delancey Street work the financial picture. When legal escalation is on the table, we coordinate with an independent attorney from our referral network so the negotiation and the litigation strategy do not contradict each other.
What To Do This Week
Pull every MCA contract and find the personal guarantee language. Build a one-page personal balance sheet. Stop using any account the funder has a routing number for. Do not sign anything new from the funder without it being reviewed.
Then get a real assessment of the exposure. A closed business does not mean a closed case, but it also does not mean catastrophe. Most of these files settle. The question is whether they settle on terms you can live with or terms the funder dictates.
Delancey Street is a business debt-relief company, not a law firm. When a matter requires legal work, we refer you to an independent attorney from our referral network; the attorney–client relationship is between you and that attorney.
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- Move quickly to stop daily ACH debits where reconciliation rights apply
- Vacate Confessions of Judgment in 72 hours
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