MCA Confessions of Judgment: The Risks Business Owners Should Understand

Imagine checking your business bank account and finding out you can't access your money. Payroll is coming up, vendors need to be paid, and you have bills to cover. When you call the bank, you learn that your account has been restrained because of a court judgment.

The shocking part? You may not have had a chance to respond before the judgment was entered.

For some business owners with merchant cash advances (MCAs), this can happen because of a clause in their funding agreement called a confession of judgment.

Understanding this clause, how it works, and what options may be available can help you make more informed decisions about your business debt.

What Is a Confession of Judgment?

A confession of judgment (COJ) is a legal mechanism that allows a creditor to seek a court judgment without going through a typical contested lawsuit.

Some commercial agreements require business owners to sign documents agreeing to this process in certain circumstances, such as an alleged default. Depending on state law and the facts of the case, a funder may use those documents to seek a judgment without the usual opportunity for the business owner to defend against a lawsuit first.

When you're focused on getting funding quickly, it's easy to overlook legal language in an MCA agreement. But this clause can have serious consequences.

If a judgment is entered and enforcement is permitted, the business could face bank account restraints or other collection actions.

However, signing a confession-of-judgment clause doesn't automatically make every judgment valid or enforceable. The applicable law, court procedures, and details of the agreement all matter.

How Can a Confession of Judgment Affect Your Business?

Consider a business owner who takes out an MCA when sales are strong and daily payments seem manageable.

A few months later, a major customer pays late, expenses increase, and a second advance adds more pressure. Suddenly, covering payroll, rent, and suppliers becomes difficult.

Then a payment fails.

Depending on the agreement, the funder may claim a default and pursue available legal remedies. If the contract includes a confession of judgment, the funder may attempt to use it to obtain a judgment.

If enforcement follows, the business owner could discover that funds in their bank account have been restrained. That can make an already difficult cash-flow situation even harder.

A missed payment doesn't automatically mean your account will be frozen. But understanding the legal remedies in your agreement before a problem arises can help you prepare.

What About UCC Filings?

Many MCA funders also file a UCC-1 financing statement, which generally gives public notice of a claimed security interest in certain business assets, such as receivables.

A UCC filing and a confession of judgment serve different purposes. A UCC filing can help establish the priority of a security interest, but it doesn't automatically authorize a funder to freeze your bank account or seize property without following applicable legal requirements.

Knowing the difference can help you better understand your agreement and the actions a funder may take.

Why Are Confessions of Judgment Allowed in Some Business Transactions?

The rules depend on the type of transaction and the state law that applies.

The Federal Trade Commission's Credit Practices Rule prohibits confessions of judgment in covered consumer credit contracts, but it doesn't provide the same broad protection for ordinary commercial transactions.

Some states restrict or prohibit commercial confessions of judgment, while others permit them under certain conditions.

New York, for example, amended its law in 2019 to restrict the use of confessions of judgment against defendants who were not New York residents when the relevant obligation was incurred.

This matters because some MCA agreements specify a particular state's laws or courts, even when the business operates elsewhere.

If your agreement refers to a state where you don't live or operate, consider having an attorney review it. The contract's wording alone doesn't necessarily determine whether every provision can be enforced.

Can a Confession of Judgment Be Challenged?

In some circumstances, yes. An attorney may review several issues to determine whether there are grounds to challenge a judgment, including:

• Jurisdiction: Did the court have authority to enter the judgment?
• Filing requirements: Were the required legal procedures followed?
• Contract validity: Is the agreement enforceable under applicable law?
• The nature of the MCA: Does the transaction qualify as a purchase of future receivables, or could it legally be considered a loan?
• Potential misconduct: Is there evidence of fraud or another legal basis for challenging the judgment?

These issues don't automatically invalidate a judgment, but they may provide grounds for legal review.

The distinction between an MCA and a loan can be especially important. Although MCAs are generally structured as purchases of future receivables, courts may examine how an agreement actually operates. If a transaction is legally considered a loan, that may affect which laws and defenses apply.

Because the outcome depends on the facts and applicable law, don't assume a judgment is either automatically valid or easy to overturn.

What Should You Do If Your Business Bank Account Is Frozen?

If you discover that an MCA-related judgment has affected your account, acting promptly is important.

1. Ask your bank for the case information.

Request the information available about the restraint, including the funder's name, the court, and the case or index number.

2. Contact a qualified attorney.

An attorney experienced in commercial debt disputes can review the judgment, explain possible challenges, and identify applicable deadlines.

3. Don't ignore the restraint.

Avoid transferring funds or closing accounts to evade a lawful restraint. Get legal advice about what you can do with the affected funds and how to handle essential business expenses.

4. Gather your documents.

Collect your MCA agreements, payment histories, default notices, bank statements, UCC filings, and correspondence from the funder. If you have multiple advances, gather each agreement so the full situation can be reviewed.

How Can You Protect Your Business Before Signing an MCA?

Before accepting an MCA, look beyond the amount of funding and the payment schedule. Make sure you understand the legal obligations involved.

Pay particular attention to:

• Default provisions: What happens if a payment fails or the funder claims you've violated the agreement?
• Confession-of-judgment language: Does the agreement allow the funder to seek a judgment through this process?
• Personal guarantees and security interests: What obligations or business assets could be involved?
• Governing law: Which state's laws does the agreement identify?
• Total repayment costs: Can your business realistically manage the daily or weekly withdrawals?

If anything is unclear, ask questions and consider having an attorney review the agreement before signing.

Dealing With MCA Debt? Understand Your Options

If you're struggling with MCA payments, have received a default notice, or have discovered a judgment against your business, there may be options worth exploring.

Some business owners may be able to negotiate revised payment terms or a settlement. Others may need legal help to address a judgment, lien, or dispute over their funding agreement.

These situations require different approaches. Negotiating a settlement doesn't automatically stop legal enforcement, and a judgment may require action through the court.

At Creditors Relief, we help business owners review their MCA obligations and explore potential ways to address the pressure of multiple advances and difficult payment schedules. We look at the bigger picture, including outstanding balances, payment amounts, contract terms, and existing liens or collection issues.

We're not a law firm, and legal disputes may require an attorney. When a judgment or other legal issue needs attention, qualified legal counsel can help you understand your rights and determine the appropriate next steps.

If MCA payments are putting pressure on your business, start by understanding your agreements and the options available to you. A review of your situation can help you identify the questions that need answers and decide how to move forward.