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The Brutal Truth About Defaulting on a Merchant Cash Advance

You Signed on the Dotted Line, Now Face the Consequences

Let’s get straight to it: you took out a merchant cash advance (MCA) to inject some working capital into your business. Smart move, right? Those funds allowed you to seize opportunities, grow your operations, and ultimately – earn more money.But now, you’re struggling to make those daily or weekly repayments. With each passing day, the outstanding balance looms larger. You’re in default territory, and the MCA company is closing in.Defaulting was never part of the plan, was it? Well, neither were the potential consequences you’re about to face. Brace yourself, because this ride is about to get bumpy.

The Vicious Cycle of MCA Default [H2]

Missed a payment? Well, you’re technically in default according to that MCA agreement you signed. That single missed payment just set off an inescapable vortex of:

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  • Additional fees and penalties: Say hello to late fees, default interest rates, and other charges that’ll increase what you owe by an obscene amount. That manageable debt? Not so manageable anymore.
  • Aggressive collections: Be prepared for a relentless barrage of calls and letters from your MCA provider’s collections department. They will pursue every last cent you owe, even if it means going to extremes.
  • A tarnished credit score: While MCA’s don’t normally appear on your credit report, any legal judgments against you certainly will. Say goodbye to your ability to secure financing for the next 6-7 years.
  • Personal liability: Did you sign a personal guarantee for that MCA? Well, congratulations – you’ve just put your personal assets like your home, car, and savings on the chopping block.
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And we’re just getting warmed up. The MCA company has plenty more tricks up its sleeve to make your life miserable.

The Dreaded Confession of Judgment

Ever heard of a “confession of judgment” or “cognovit note”? No? Well, allow me to explain this legal loophole that could spell disaster for you and your business.By signing one of these insidious clauses (which are often buried in MCA agreements), you’ve voluntarily waived your right to defend yourself in court. [BOLD]Think about that for a second. With a confession of judgment, the MCA company can basically waltz into court and obtain a judgment against you without you ever being present or having a chance to make your case.From there, they’re free to:

  • Freeze and drain your business bank accounts
  • Seize your assets like equipment, inventory, and vehicles
  • Garnish your wages
  • Go after your personal wealth if there was a personal guarantee

All without you having any say in the matter. Terrifying, isn’t it? But hey, you did sign that agreement after all.

When the Debt Collectors Come Calling

Hopefully, it doesn’t come to this. But if the MCA company’s own collections efforts fail, you can expect a debt collector to start sniffing around soon after.These third-party agencies are relentless, unforgiving, and often employ extremely aggressive tactics, such as:

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  • Repeated calls to you, your employees, friends, and family at all hours
  • Showing up unannounced at your home or workplace
  • Contacting your customers to divert payments to them instead of you
  • Threats of legal action, asset seizure, wage garnishment, and more

Remember, debt collectors play by their own set of rules. They have no incentive to be reasonable or cut you any slack. To them, you’re simply a name and dollar amount on a spreadsheet to be collected at any cost.And if they decide legal action is the way to go? Well, let’s just say the court system tends to favor creditors over debtors when it comes to MCA debt.

The Vicious Cycle Continues

Still think you can dig your way out? Think again. MCA companies are masters of predatory lending, and they have no qualms about burying you in an endless cycle of debt.Even if you’re struggling with repayments, some will gladly offer you a new MCA or “debt consolidation” program. The hook? You have to provide your latest accounts receivable data, allowing them to go after your customers for payments.See the vicious cycle here? More debt, more exposure, more vulnerability for your business. It’s a trap, plain and simple.At this point, you may be thinking “well, I’ll just file for bankruptcy to get out of this mess!” Not so fast…

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Why Bankruptcy May Not Be an Option

In an ideal world, bankruptcy would be a last-resort escape hatch to discharge your MCA debt. But in reality, it’s extremely difficult to get MCA debt discharged in bankruptcy.Remember that personal guarantee you signed? Well, that means you are personally liable for repaying the MCA, even if your business files for bankruptcy.The MCA company can simply go after your personal assets and income to collect what you owe. And if they already have a judgment against you, that makes the process even easier for them.Filing for bankruptcy might temporarily halt collections efforts. But it won’t make that debt magically disappear. The MCA company will fight to ensure your debt to them remains intact.So in summary: bankruptcy may not provide the fresh start you’re hoping for when it comes to resolving MCA debt. It could very well be a long, expensive, and ultimately fruitless process.

Protecting Yourself When Default Is Unavoidable

At this point, you may be feeling a combination of dread, regret, and hopelessness. But don’t lose faith just yet – there are still steps you can take to protect yourself and your business:

1. Read the fine print, every word of it 

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Go back and review your MCA agreement(s) thoroughly with a fine-toothed comb. Make sure you fully understand what you agreed to, especially terms like:

  • Personal guarantees
  • Confession of judgment/cognovit note clauses
  • Default interest rates and penalties
  • The MCA company’s ability to pursue legal action

Knowledge is power. Knowing exactly what you signed will help manage expectations and give you a better idea of your rights and recourse options.

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2. Consult legal experts, not your best friend’s uncle

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Trying to navigate MCA default on your own is asking for trouble. These are legally-complex situations that require the guidance of real experts.A qualified MCA attorney can review your agreements, advise you of your rights and options, negotiate with creditors on your behalf, defend you against legal action, and more. Don’t try to cheap out here – get professional help.

3. Explore debt settlement and negotiation

Even if you’ve already defaulted, you may still be able to negotiate a reduced settlement with your MCA creditor(s). Debt settlement allows them to recover something while avoiding a costly legal battle.An experienced debt negotiator can approach the MCA company, assess what you can realistically afford to pay, and work to reach a resolution that works for both parties. It’s a far better option than simply waiting for the collectors to come knocking.

4. Prepare for battle, not surrender

If the MCA company does decide to pursue legal action against you, do not simply roll over and accept defeat. With the right defense strategy and representation, you may be able to:

  • Get a judgment vacated or dismissed
  • Prove the MCA was actually a usurious loan and therefore illegal
  • Argue a violation of your rights occurred
  • Negotiate a workable settlement or repayment plan

The key is to lawyer up and fight back. Don’t let the MCA company bully you into submission just because they’re the creditor.5. Cut your losses by invoking reconciliation [H3]If your business’s revenue has dropped significantly, you may be able to invoke the reconciliation clause in your MCA agreement. This allows you to adjust or pause payments to match your current income level.While it won’t make your debt disappear, it can provide some breathing room to get back on stable financial footing. Just make sure you have documentation proving the revenue decline.At the end of the day, knowledge, proactivity, and professional guidance are your best defenses against the fallout of MCA default. Don’t stick your head in the sand and hope it goes away – that will only make the situation worse.

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