Defaulting on an MCA: the real consequences

01The COJ filing window is shorter than you think — and the clerks don't care if you didn't know

Everyone tells you about Confessions of Judgment, and if you don't know — you'll learn soon enough if one has been filed against you. The consequences are literally immediate. Almost nobody explains the actual mechanics of what happens in the 48–72 hours after you miss your second ACH.

In New York (where most COJs got filed before the 2019 reforms), the funder's lawyer doesn't need to notify you at all. The agreement you signed includes language in it that allows them to literally walk into a courtroom and file the COJ, and by the time you wake up the next morning your bank account is drained. They walk into the county clerk's office, hand over the signed COJ, an affidavit of non-payment, and a filing fee. Judgment entered same day — no negotiation, no pleading, no summons and complaint, nothing, just a cold action.

The clerk has no statutory authority to question whether the underlying contract is a loan vs. a true purchase of receivables — that's a question for a judge, and you haven't seen one yet, and you never will, due to the nature of how COJs work.

If your contract was signed pre-2019 and you're a non-NY merchant, there may still be an enforceable COJ sitting in someone's drawer. Funders have been known to hold these for years before filing.

02UCC lien notifications go to your customers — not just your processor

This is the one thing that truly destroys businesses faster than the lawsuit itself. I've seen businesses crushed, because customers refuse to work with you anymore and don't want to get dragged into whatever nightmare you've found yourself in.

When you signed the MCA, you granted a UCC-1 security interest in your receivables. On default, the funder doesn't just freeze your merchant account — they send notification of assignment letters directly to your customers, your factoring company (if you have one), and anyone who owes you money. The letter says, roughly:

Your customers now know you're in financial distress, they have a legal question about who to pay, and your AR is encumbered. More importantly, you now have immense reputational damage. Good luck.

I've watched 7-figure construction companies lose their largest GC relationship in a week because the GC's legal department got one of these letters and decided the headache wasn't worth it. The lender tried scaring the GC — implying that if the GC didn't reroute the revenue, the GC would get sued. The lawsuit becomes secondary. The reputational damage is the real kill shot.

03Stacking creates a creditor priority war that nobody explains

If you have 3–4 MCAs (and let's be honest, most people reading this do — they took another MCA to pay the previous one), defaulting on one triggers a race. Each funder filed a UCC-1. The earliest filer has priority on your receivables, but now all lenders are scared, threatening you, and going to try and get their money back ASAP. But MCAs are structured as purchases of specific future receivables, not blanket liens, so there's a legitimate legal argument that priority doesn't work like traditional secured lending.

What happens in practice:

1. Funder #1 (first position) sues and freezes accounts.
2. Funder #2 sees the filing on PACER and immediately files their own action to avoid being subordinated.
3. Funders #3 and #4 follow within 72 hours. You now have 4 simultaneous lawsuits, 4 sets of legal fees, and 4 different attorneys who will not coordinate with each other because they're each trying to grab assets first.

04Personal guarantee enforcement is where the real pain lives

Most articles will mention "you signed a personal guarantee." Almost none explain what enforcement of a personal guarantee actually looks like.

Once they have a judgment against you personally, here's what's coming:

• Subpoenas demanding full disclosure. Every bank account, brokerage account, vehicle, real estate holding, and source of income. And don't think you can lie — lying is perjury, refusing is contempt.
• Bank levies. They send restraining notices to every bank you've ever had a relationship with. Banks are required to freeze funds for 30 days without telling you first.
• Real estate liens. Docketed against any property you own in that county. You can't sell or refinance without satisfying the lien.
• Wage garnishment. If you're paying yourself a W-2 salary from your business, that's garnishable. If you switched to "owner draws" to avoid this, that's a fraudulent conveyance question.
• Spousal exposure. In community property states, and even in some equitable distribution states, they can subpoena joint accounts and attempt to argue commingling with your spouse's money.

05The reconciliation clause is your best legal argument — and almost nobody uses it correctly

Every MCA contract contains a reconciliation clause. It's part of every agreement, and it's the thing that legally distinguishes an MCA (purchase of receivables) from a loan (which would be usurious at MCA rates). Many people don't realize it: if it weren't for the reconciliation provision, the contract would be null and void.

The reconciliation allows you to lower the payment in line with your revenue — which is what makes the product a cash advance instead of a loan. The clause says: if your revenue drops, you can request a reconciliation, and the funder will adjust the daily/weekly remit to reflect the new receivables.

That denial is the legal argument that helps you in court when you're trying to convince a judge the lender broke the agreement first — that the lender defaulted first.

Courts in NY (Champion Auto Sales, LG Funding v. United Senior Properties, and the Davis v. Richmond Capital line of cases) have held that when a funder refuses to reconcile in good faith, the transaction can be recharacterized as a loan. If it's a loan at MCA rates, it's criminally usurious and void ab initio — meaning unenforceable from the beginning, and you may even claw back what you paid.

The play: document every reconciliation request, every denial, every absurd documentation demand — in writing. The goal is to be able to say, "Your honor, the lender failed to abide by his end of the agreement and breached the contract first." That paper trail is worth more than any debt relief negotiator. It's the difference between settling at 50 cents on the dollar and walking away owing zero.