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How To Defend Against Merchant Cash Advance Lawsuits

Merchant cash advances (MCAs) have become a popular alternative financing option for small businesses in recent years. However, MCAs come with some major drawbacks – namely high fees, short repayment periods, and confusing contract terms. This often leads borrowers into a debt trap, unable to keep up with repayment schedules. When this happens, MCA lenders frequently sue business owners for breach of contract.If you find yourself facing an MCA lawsuit, it’s crucial to understand your rights and craft an effective defense strategy. This article will provide an overview of how to defend against MCA lawsuits.

Know Your Rights as a Borrower

  • MCAs are not considered loans, so they are largely unregulated. This means MCA companies can charge very high fees and interest rates.
  • Many states have usury laws capping interest rates on loans. But since MCAs technically aren’t loans, lenders can skirt these laws.
  • MCA contracts often contain provisions like confessions of judgement and personal guarantees. These limit your ability to defend yourself if sued.
  • Some states have recently enacted regulations on MCA lending practices. Check if any apply in your state.
  • Federal laws like the Truth in Lending Act may offer some protections. An attorney can assess if the MCA violated any laws.

Review the MCA Agreement

Carefully examine the original MCA contract to understand the terms and consequences of defaulting. Look for:

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  • Interest rates, fees, and payment schedules
  • Personal guarantees – stipulations making you personally liable
  • Confessions of judgement – waiving your right to defend yourself
  • Choice of law and venue – often New York due to lender-friendly laws
  • Any provisions that seem predatory or unfair

Consult an Attorney

  • Hire an attorney experienced in MCA lawsuits. They can analyze the agreement and advise your best defense options.
  • Ask about negotiating a settlement before going to court. Many cases settle out of court.
  • Understand all possible defenses. Your attorney may argue the MCA is actually an illegal loan or that improper lending practices were used.
  • Be aware of time limits. You typically have 20-30 days to respond to a lawsuit.

File a Response

  • Never ignore a lawsuit! You must respond promptly, or you risk losing by default.
  • Work with your attorney to file an Answer responding to each claim. Raise any defenses and counterclaims.
  • Counterclaims could include improper lending practices, contract violations, interference with business, etc.
  • Include counterclaims in initial Answer. You can’t add later.
  • Gather evidence like payment records and communications with the lender.

Negotiate a Settlement

See if you can negotiate a deal with the MCA company before going to court:

  • Your attorney can negotiate a payment plan or reduced payoff amount.
  • Agreeing to a settlement could end the lawsuit faster and cost less than litigation.
  • But don’t settle for an unreasonable repayment plan you can’t afford. Consult your attorney.
  • Get any settlement agreement in writing before paying anything.

Defend in Court

If you can’t settle out of court, be prepared to litigate:

  • Attend all hearings. Follow court orders.
  • Only a qualified local attorney should represent you in court.
  • Your attorney can argue the MCA contract is invalid or fight the claims against you.
  • The lender must prove a breach occurred. Make them work for it.
  • Discovery can help uncover evidence to support your defenses.
  • Consider filing a Motion to Dismiss early on if the lawsuit is unfounded.

Explore Bankruptcy

For extreme cases, bankruptcy may discharge MCA debt:

  • Personal bankruptcy can eliminate personal liability but usually won’t discharge business debt.
  • Business bankruptcy discharges business debts but is complex. Consult a bankruptcy attorney.
  • Bankruptcy damages your credit and should be a last resort option.

Act Quickly!

  • As soon as you get notice of an MCA lawsuit, contact an attorney.
  • Time limits are short. You could lose the case by default if you don’t respond promptly.
  • An experienced attorney can protect your rights and build the strongest defense.
  • Don’t try to handle an MCA lawsuit without legal counsel. The laws are complex.
  • Be proactive. If you foresee defaulting on an MCA, get legal advice right away.

Common MCA Defense Strategies

Your attorney may use one or more of these approaches:

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  • Argue the MCA is an illegal loan – If the MCA violated lending laws, it may be void. Interest rates over 25% may be criminal usury in some states.
  • Dispute the claims – Fight back against allegations of breach of contract. Make the lender prove it.
  • Assert affirmative defenses – Defenses like fraud, duress, and unconscionability can invalidate contracts.
  • File counterclaims – If the lender used improper practices, file claims against them.
  • Attack contract provisions – Challenge enforceability of confessions of judgement, guarantees, etc.
  • Negotiate a settlement – Offer a lump sum payment or payment plan to end the lawsuit.
  • File for bankruptcy – Discharge debt through Chapter 7 or Chapter 11 bankruptcy.
  • Request contract reformation – Ask the court to modify an unconscionable contract to be more reasonable.
  • Procedural defenses – Argue the lawsuit was filed improperly or in the wrong venue.

Conclusion

Dealing with an MCA lawsuit can be daunting, but proper legal representation will give you the best chance of success. Understand your rights, review the agreement, and consult an attorney immediately. Respond to the lawsuit right away. From there, your lawyer can advise the best defense strategies based on your specific situation. Be prepared to negotiate, go to court if needed, or in extreme cases, pursue bankruptcy. With the right merchant cash advance defense, you can protect your business assets and reduce or eliminate the debt burden.

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