Defaulting on an MCA with a personal guarantee

When you signed that MCA agreement, you probably skimmed past the personal guarantee. Most people do. It was one more signature at the end of a stack of documents, and the broker was telling you the funds would hit tomorrow, and you needed the money. So you signed.

Short answer: A personal guarantee means when the business can’t pay, you pay. The MCA funder can come after your house, your car, your personal bank accounts, your wages from any other job, and anything else with your name on it. The business defaulting doesn’t end the problem, it just moves the problem from the business to you personally. And in New York, where most MCA funders file suit, they have tools that move faster than almost anywhere else in the country.

If you signed a personal guarantee, and you’re thinking about defaulting, you need to understand what you actually agreed to before you make any decision at all.

What a personal guarantee actually does

The personal guarantee is a separate contract, attached to the MCA agreement, where you personally promise to pay if the business doesn’t. It’s not a formality. It’s the entire reason the funder gave you the money in the first place. MCA funders know small businesses fail, they know cash flow gets tight, they know the daily ACH can break a company. The personal guarantee is their backstop. When people say “the MCA is just against the business” – this is wrong, almost always wrong, and it’s the single most common misunderstanding we see.

Under a typical personal guarantee, you are personally liable for:

• The full purchased amount, not just what’s left on the daily payment schedule
• Default fees, which can run 10-25% of the balance
• Attorney fees, which the MCA lender will tack on aggressively
• Court costs, filing fees, service of process costs
• Interest on the judgment, which in New York runs at 9% per year, compounding
• Any costs of collection, including investigators, skip tracers, and asset searches

The guarantee is usually worded to survive everything. Business bankruptcy? The guarantee survives. Business dissolution? The guarantee survives. You selling the business? The guarantee survives, unless the MCA funder specifically releases you in writing, which they almost never do.

What happens when the business defaults, and you’re the PG

Here’s the sequence, in the order it usually plays out.

• The business stops paying, or bounces an ACH, or does something else that triggers default under the agreement. The MCA funder accelerates the balance within days, sometimes within hours.
• The in-house collections team, or an outside collector, starts calling. They call the business, they call your cell, they call your home. If you have a spouse who answered the application call, they might call your spouse. This is normal for MCA collections, and it happens fast.
• A demand letter gets sent to you personally, at your home address. This is the first sign that the funder is shifting from “business problem” to “you problem.” The letter will reference the personal guarantee, and it will demand the full accelerated balance, with a deadline, usually 5-10 days.
• If you don’t pay, or don’t respond, the funder files suit. In New York, they file in state court, usually in Kings County, Nassau County, or Erie County – these are the venues MCA funders prefer because they move fast, and because they have experience with MCA cases. The suit names the business, and it names you personally as the guarantor.
• Here’s where it gets serious. Many MCA funders, not all but many, will seek a temporary restraining order, or an order of attachment, against your personal assets at the same time they file suit. These can be granted ex parte, meaning without you even knowing, and they can freeze your personal bank accounts within 24-48 hours of filing. You find out when you try to use your debit card at a gas station, and it declines.
• If they get a judgment, and they usually do because most people don’t answer the suit, the judgment is entered against you personally. That judgment is now a public record, it shows up on your credit, and it becomes a lien on any real property you own in the county where it’s entered.

Why New York is different

Most MCA agreements have a New York choice of law, and a New York venue clause, even if you’ve never been to New York. This is deliberate. New York has a device called the “confession of judgment,” which until 2019 allowed MCA funders to get a signed, pre-agreed judgment on file the moment you defaulted, no lawsuit needed. The law changed, confessions of judgment can no longer be used against out-of-state debtors in MCA cases, but New York is still the preferred venue because the courts are fast, the judges have seen these cases before, and the enforcement mechanisms (restraining orders, attachments, income executions) work quickly.

If you’re in California, Texas, Florida, wherever, and your MCA has a New York venue clause, you will be defending, or defaulting on, a lawsuit 2,000 miles from home. Most people don’t show up. Most people lose by default judgment.

What they can actually take

This is the question everyone asks, and the answer depends on your state, not on the MCA. Once the funder has a judgment, they take it to the state where your assets are, and they enforce under that state’s rules.

In most states, the funder can:

• Freeze and levy personal bank accounts, everything above whatever the state exemption is, which is usually small
• Garnish wages from any W-2 employment, up to 25% of disposable income in most states
• Place a lien on real property, including your home, your rental properties, any land
• Seize non-exempt personal property, vehicles above the exemption amount, boats, jewelry, collectibles
• Intercept business payments, if you’ve started another business, through third-party subpoenas and information subpoenas

What they usually can’t take, and this varies wildly by state:

• Retirement accounts, 401(k)s, IRAs are usually protected under ERISA and state law
• Primary residence homestead, protected up to the exemption amount, which ranges from almost nothing in some states to unlimited in Florida and Texas
• Social Security, disability, unemployment, these are federally protected in most cases
• Tools of the trade, up to a state-specific exemption

The practical reality is, if you have a house in Florida, significant retirement savings, and you’re careful, a judgment creditor can make your life very uncomfortable, but they can’t necessarily liquidate you. If you have a house in a state with weak homestead protection, significant non-retirement savings, and W-2 income, they can take almost everything.

What to do if you’re in this situation

Don’t wait for the demand letter. Don’t hope it goes away. Don’t assume the business filing bankruptcy solves the PG, it doesn’t.

• Call an attorney who does MCA defense, specifically. Not a general business lawyer, not your cousin who did your LLC. Someone who has defended MCA cases before, and knows the New York playbook, and the judges, and the plaintiff’s firms. There are maybe 30-40 attorneys in the country who actually do this work.
• Don’t move money out of your personal accounts in a panic. Fraudulent transfer law is real, and it follows the money for years. Moving $50,000 to your brother’s account the week before a lawsuit is not a strategy, it’s evidence.
• Understand your state’s exemptions. What’s protected in your state, what isn’t, what the homestead limit is. This determines everything about your leverage in a settlement.
• Negotiate. Almost every MCA case settles, at some point, for some number less than the full balance. The question is whether you settle before the judgment, before the restraining order, before the wage garnishment, or after. Earlier is always cheaper, always.

The personal guarantee is the part of the MCA that follows you after the business is gone. The business can close, the LLC can be dissolved, the assets can be sold off, and you’ll still owe the money personally. That’s the trade you made when you signed. Now the question is what you do about it.