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

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 struggling to make the payments, you may be worried about aggressive collection tactics like wage garnishment or bank account levies. Here‘s what you need to know about your rights and options.

How Merchant Cash Advances Work

First, let’s quickly review how merchant cash advances work. An MCA provides a business with a lump sum of capital in exchange for a percentage of future credit card sales. It‘s not technically a loan, but rather the purchase of future receivables at a discount.There’s usually no set repayment schedule – the MCA company takes a fixed percentage of daily credit card sales automatically until the advance has been repaid in full. This repayment structure means slower periods for the business’s cash flow can make it harder to pay back the advance.

When Repayment Problems Arise

Many businesses run into issues repaying their merchant cash advance for a variety of reasons:

• Lower than expected sales
• Economic downturns
• High percentages being taken from daily credit card sales
• Multiple cash advances stacking up

When this happens, MCA companies can become very aggressive with their collection efforts, resorting to tactics like:

• Harassing phone calls
• Threatening letters and emails
• Freezing bank accounts
• Garnishing wages

This aggressive behavior is often an attempt to scare business owners into paying, even if they realistically can‘t afford to. But do MCA companies actually have the legal right to garnish wages or levy bank accounts?

The Legality of Wage Garnishments and Bank Levies

• MCA agreements are commercial transactions, not loans
• Commercial debts typically can’t be collected through wage garnishment or bank levies
• But MCA companies may still threaten these actions to frighten borrowers
• Always consult an attorney to understand your rights in your state

The reality is merchant cash advances are commercial transactions involving the purchase of future receivables – they are not actual loans. And commercial debt collection generally does not permit aggressive involuntary collection methods like wage garnishment or bank account levies.However, some MCA companies will still threaten these actions in an attempt to scare business owners into paying, even if the business is facing financial hardship. They count on business owners not realizing these threats have no legal validity with MCA agreements.The lesson here is not to panic or cave into pressure from empty threats. If an MCA company tells you they are going to garnish your wages or freeze your bank account, consult with a business attorney before agreeing to anything or making additional payments you can’t afford. An attorney can review your agreement and clarify whether the MCA company has any right to take these actions.

Responding to Threats of Wage Garnishments and Bank Levies

If you receive written or verbal threats about wage garnishments or bank account levies, here are some tips:

• Get it in writing – If the threats are verbal (over the phone), ask the MCA representative to provide their demands in writing.
• Consult an attorney – Show the written demands to a lawyer in your state to understand if they have any legal standing.
• Send a formal dispute letter – With your attorney’s help, send a letter disputing their claims and clearly stating they have no right to involuntarily garnish wages or levy bank accounts based on the MCA agreement.
• File complaints as needed – If the harassment continues, file complaints with agencies like the FTC, CFPB, and your state’s Attorney General’s office.

With the help of an attorney, you can usually put a stop to invalid threats from MCA companies quickly with formal dispute letters. If they persist, regulatory complaints can also be effective in getting them to back off.

When Wage Garnishments and Bank Levies May Be Valid

While wage and bank garnishments generally don’t apply to MCA agreements, there are two situations where they could be legally valid:

1. If legal judgments have been obtained
2. If personal guarantees were signed

Let’s explore these in more detail.

Legal Judgments

If an MCA company has filed a lawsuit over the debt and successfully obtained a legal judgment against the business owner, then wage garnishments and bank levies could be possible options for them to enforce the judgment.However, legal experts argue that MCA companies will have a very difficult time proving their case in court to get a judgment, since MCA agreements are so easy for businesses to dispute due to their structure.So while judgments enabling involuntary collection are possible in theory, they are generally unlikely with properly disputed MCA agreements.

Personal Guarantees

Some MCA companies may require business owners to sign a personal guarantee, stating the owner will be personally responsible for repaying the advance if the business defaults.If a personal guarantee exists, the MCA provider could have more leverage to pursue legal judgments against you personally if the business can’t pay – judgments that could then open up wage garnishment as an option for them.However, many courts have ruled personal guarantees to be unenforceable when the underlying contract (the MCA in this case) is disputed or void.So if the MCA agreement itself is legally disputed, that can potentially nullify the personal guarantee as well.

Strategies to Dispute Threats

As you can see, wage and bank garnishments related to MCA agreements have significant limitations and challenges for collection companies seeking to actually enforce them legally.Here are some key strategies business owners can use to dispute invalid threats:

• Negotiate a Settlement – Offer realistic, affordable monthly payments based on a percentage of revenue. Get any new agreement in writing before paying.

• Dispute the Contract – Consult an attorney to identify defects in the original MCA agreement that could render it legally void.
• File Regulatory Complaints – File with the FTC, CFPB, and state Attorney General regarding deceptive collection practices.

• Demand Validation – Require debt collectors to formally validate the debt and their right to collect in writing.
• Send a Cease and Desist Letter – Formally demand debt collectors stop all contact regarding the invalid debt.

With the help of legal counsel, most small business owners can successfully avoid wage garnishment and bank account levies related to MCA agreements through various dispute strategies. Don’t let unlawful threats bully you into making payments you can’t afford.

Finding the Right Lawyer for Assistance

If you need legal help responding to threats from an MCA provider, look for attorneys experienced in the following areas:

• Debt Collection Defense – Understanding consumer protection laws related to debt collection harassment.

• Commercial Litigation – Handling legal disputes related to business contracts and agreements.

• Bankruptcy – Exploring whether bankruptcy may be an option if debts are truly unmanageable.

Good resources to find qualified lawyers include:

• National Association of Consumer Advocates
• American Bar Association
• State Bar Association Referral Services

When facing threats from MCA companies, don’t go it alone. An experienced attorney can help you understand your rights and the best path forward.

Responding to Lawsuits Filed Over MCA Agreements

If an MCA provider does follow through with a lawsuit over your agreement, take it very seriously and be sure to formally respond within the required timeframe – typically 21-30 days.You’ll want to consult your lawyer on the optimal legal strategy, which could include:

• Filing an Answer disputing the claims – This puts them to their proof.
• Asserting Affirmative Defenses – Like breach of contract, fraud, or unfair practices.

• Filing Counterclaims – If the agreement violated state laws.
• Seeking Contract Invalidation – If there were defects making it void.
• Requesting Validation of Debt – Requiring proof you actually owe it.

Properly disputed, most MCA lawsuits end up dismissed in favor of borrowers. But impeccable documentation and legal support are vital from the very start.

Finding an Affordable Attorney

Of course, hiring a business litigation lawyer to defend against an MCA company can be expensive. If funds are limited, some options to explore include:

• Legal Aid Organizations – If you qualify based on income, legal aid provides pro bono legal services.

• Law School Clinics – Some law schools offer free clinics where students gain experience assisting small businesses.

• Limited-Scope Representation – Attorneys provide help with only certain aspects of your case at a lower cost.
• Payment Plans – Many lawyers are open to custom payment arrangements.

Don’t let worries over legal fees deter you from seeking counsel when faced with threats from MCA companies. There are resources available for assistance even when money is tight.