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When Can a Merchant Cash Advance Garnish My Wages or Bank Account?

If you’re a small business owner who has taken out a merchant cash advance (MCA) and is now facing financial difficulties, you may be worried about wage or bank account garnishment. This can happen if you fall behind on payments and the MCA company obtains a judgment against you. However, there are certain legal processes that must occur before garnishment can happen.

Understanding Merchant Cash Advances

First, it’s important to understand what a merchant cash advance is. An MCA provides a business with a lump sum of capital in exchange for a percentage of future credit card sales. It is not technically a loan, so MCA companies can bypass state usury laws and charge very high effective interest rates.MCAs appeal to small businesses because:

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They provide quick access to capital without stringent credit requirements
Payments are tied to credit card revenue, so if your sales are down, your payments go down.

However, MCAs also come with major downsides:

Extremely high effective interest rates – often over 100% APR
Aggressive collections tactics if you fall behind
Personal guarantees make business owners personally liable

So while MCAs provide easy money up front, you risk your personal finances if your business struggles.

How Merchant Cash Advances Lead to Wage/Account Garnishment

If you fall too far behind on MCA payments, here is the typical sequence of events:

Breach of contract – Your MCA agreement is breached if you miss payments
Demand letter – The MCA company sends a formal demand letter requiring payment
Civil lawsuit – If the debt remains unpaid, the MCA company sues you for the balance plus very high penalties/fees
Court judgment – If the company wins in court, they obtain a judgment against you personally
Bank levy – The MCA company can seize money directly from your bank accounts
Wage garnishment order – They can also obtain a court order to have your wages garnished

So in summary – if you breach your MCA contract and proceed to lose in court, the company can legally take the money you owe directly from your paychecks or bank accounts.

Responding to Demand Letters

If you receive a demand letter from an MCA company, it means you need to take action quickly to avoid further legal consequences. Here are some steps we recommend:

Don’t ignore it – Call the company immediately to discuss payment options. Any delay worsens your position.
Review your agreement – Make sure the amount they claim you owe is accurate. Dispute any unfair fees/penalties.
Try negotiating – Many MCA companies will negotiate payment plans or settlements at this stage to avoid the legal process.
Get professional help – Contact a lawyer to review your options and negotiate on your behalf. Legal expertise can be invaluable.

The key is being proactive at the demand letter stage. Constructively engaging the MCA company early maximizes your chances of avoiding a lawsuit.

Fighting Back Against MCA Lawsuits

Unfortunately, some MCA companies will proceed with lawsuits even if you make good faith efforts to resolve the debt. If you find yourself facing legal action, working with a lawyer to mount a vigorous defense is critical.Here are potential counterclaims or defenses to explore:

Unconscionability – Argue the interest rates and fees are so extreme that the contract is invalid. Interest rates over 60% are often deemed unconscionable.
Deceptive practices – Claim the MCA company misled you about costs, obligations, etc. This can invalidate all or part of the debt.
Breach of contract by MCA company – Review if the company violated any contractual terms themselves. This weakens their case.
Improper service – Attack flaws in how you were served the lawsuit papers. Dismissals on procedural grounds are common early in cases.
Binding arbitration clause – Many MCA agreements require out-of-court arbitration to resolve disputes. This is often faster and less costly.
Settlement – Offer to settle for a percentage of the claimed amount. Many companies will settle to ensure some payment.

The litigation process takes time, so you also have breathing room to improve your financial position. Explore options like new financing, credit counseling, or debt restructuring while the lawsuit plays out.

Garnishment Defenses

If an MCA company is awarded a judgment against you personally and subsequently seeks to garnish your wages or bank accounts, you still have defenses:

File a claim of exemption – You can claim certain assets are legally exempt from garnishment under your state’s laws. For example, some states protect up to 75% of wages.
Challenge improper garnishment – Similarly, if the MCA company did not properly complete all procedural steps for a garnishment order, the court can dismiss it.
Declare bankruptcy – Filing for Chapter 7 or Chapter 13 halts all collection activity, including garnishment. This provides time to reorganize finances.
Negotiate settlement – Make a settlement offer to cover a portion of the judgment. Offer a lump sum payment in exchange for releasing garnishment orders.
Wait out limitations period – In some states judgments expire after a number of years. Stall until the MCA company can no longer legally collect through garnishment.

So in summary – wage and bank account garnishment can happen if an MCA company is granted a judgment against you personally for a delinquent account. However, working with a qualified lawyer gives you strong defenses to either defeat the lawsuit outright or halt any subsequent garnishment orders. Don’t hesitate to seek professional support.

Finding the Right Legal Help

If you are facing legal action from an MCA company, having an experienced lawyer on your side is critical. Here are tips for choosing the right legal help:

Search state bar association directories – All state bars allow you to browse local lawyers by practice area. Search for ones focused on financial or debt cases.
Ask business groups for referrals – Contact your local Chamber of Commerce or small business associations. They often have lists of members who assist other entrepreneurs.
Look for lawyers familiar with MCA cases – Because MCAs have unique legal issues, seek someone with specific experience fighting these companies.
Inquire about pricing models – Ask if flat fee arrangements are possible rather than hourly billing. This controls costs.
Meet lawyers before retaining – Schedule initial consultations and gauge responsiveness. Make sure you choose someone aggressive yet ethical.

And remember – time is of the essence if you get a demand letter or are served with legal papers over an MCA debt. Having a lawyer reviewing documents and acting on your behalf quickly maximizes the chance of preventing wage garnishment down the road. Don’t let fear of attorney fees deter you from seeking help early. The cost of losing in court is far higher.

Proactive Steps If You Have an MCA

The best protection against wage/bank garnishment over an MCA debt is avoiding default in the first place. If you currently have an outstanding merchant cash advance agreement, here are some proactive steps to take:

Carefully monitor sales and payment schedules – Don’t let balances creep up on you. Forecast coming months’ revenue and required payments.
Communicate issues early – Contact the MCA company at the first sign of financial strain. Renegotiating terms is easier before default.
Explore refinancing – If the MCA has too high payments long-term, seek alternatives like business loans to pay it off.
Consult professionals – Talk to a small business lawyer and financial advisor. They can review your situation and suggest constructive strategies.
Consider business changes – If the MCA payments are not sustainable given your current sales, brainstorm operational tweaks to increase revenue.

While easier said than done, taking control of your financial position makes it less likely an MCA provider can legally access your personal wages or assets. Don’t hesitate to seek help early – both legal and financial – when working through MCA debt issues.

Final Thoughts

Merchant cash advances undoubtedly provide fast access to capital for small businesses. However, if sales drop and you cannot keep up with payments, MCA providers can aggressively pursue legal action against both your company and personally as the owner.Wage and bank account garnishment are real risks if an MCA company is granted a judgment against you. But there are defenses available at every stage of the process – from initial demand letters through lawsuits and even garnishment orders.Seeking qualified legal help immediately gives you the best chance of avoiding wage seizure. An experienced lawyer can advise you regarding applicable state laws and build a case challenging the MCA company’s collection efforts.At Delancey Street, our team has extensive experience assisting small business owners threatened with legal action over merchant cash advances. If you have received a demand letter or been served papers by an MCA provider, contact us today for a free consultation. We will aggressively defend your interests and work to achieve the best possible outcome given your situation, whether negotiating an alternative payment plan, fighting the lawsuit, or halting garnishment orders.Call 212-210-1851 or visit our website https://www.delanceystreet.com to learn more about how our lawyers can help protect your finances, wages, and assets. The sooner you contact us, the more strategic options we have available. Don’t wait – a proactive approach is key to preventing wage garnishment down the road.

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