Can a Merchant Cash Advance Garnish Your Wages?

Picture this: You needed fast capital, so you traded a slice of future sales for quick cash. Now the MCA company is breathing down your neck and you wonder, can they reach into my paycheck? Let’s walk through the maze, step by step, no jargon, plenty of signposts.

Understanding Merchant Cash Advances in Plain English

An MCA isn’t a loan. It’s an advance on future revenue. You receive a lump sum and agree to let the funder take a fixed percentage of daily card sales until the balance (plus hefty fees) is repaid. Think of it like selling tomorrow’s apple harvest to buy seeds today, helpful if the crop grows, painful if drought hits.

How MCA Agreements Are Structured

• Purchase and Sale Language: Contracts say the funder “purchases” receivables.
• Daily/Weekly Drafts: Payments come out automatically through ACH, often daily.
• Remittance Rate vs. Factor Rate: The remittance rate is the slice of sales; the factor rate (1.2-1.5+) dictates total owed.
• Personal Guarantees: Many agreements ask owners to back the deal personally.

The Concept of Wage Garnishment Explained

Wage garnishment is a legal order that directs an employer to withhold part of your paycheck and send it to a creditor. It usually follows a court judgment. Without that judgment, creditors can’t tap your wages. Picture it like a drawbridge: courts decide when to lower it so creditors can cross.

Does an MCA Have the Legal Right to Garnish Wages?

Short answer: not automatically. Long answer: it depends on contract clauses, state law, and the path the funder takes. MCAs typically prefer to seize business revenue before chasing personal wages, but if you signed a personal guarantee, or a confession of judgment, the door cracks open.

Confessions of Judgment and Their Role

A confession of judgment (COJ) is a pre-signed admission that you owe the debt. The funder files it with the court, often without notice, and a judgment enters almost instantly. Once they have that judgment, garnishment becomes easier.

Court Judgments: The Gatekeepers to Garnishment

Even with a COJ, funders must file in a court with jurisdiction. After judgment, they can pursue enforcement tools: bank levies, liens, and yes, wage garnishment. No judgment, no garnishment.

State Laws That Shape the Outcome

• New York & Confessions: NY used to welcome COJs; new rules restrict out-of-state filings.
• Texas & Wages: Texas bans most wage garnishments except for child support, taxes, and student loans.
• Florida & Head of Household Exemption: Protects some wages if you provide more than half of household support.

Every state carves its own road. Know your map.

Step-by-Step Process Lenders Must Follow

1. Default: You miss scheduled ACH pulls.
2. Demand Letter: Funder issues notice of breach.
3. Filing COJ or Lawsuit: They file in court for judgment.
4. Judgment Entered: Court approves.
5. Garnishment Order: Creditor requests wage garnishment.
6. Employer Served: Your HR department receives order.
7. Deductions Begin: A slice of net pay (often up to 25% under federal law) is withheld.

Signs Your Wages Might Be at Risk

• Calls or emails citing a COJ.
• Sudden freeze on business bank accounts.
• Court paperwork delivered to your address.
• Employer asking about debt documents.

Spotting smoke early can keep the fire small.

Defenses Business Owners Can Raise

• Fraudulent Transfer Claims: Argue the MCA is really a disguised loan with usury violations.
• Improper Service: If you weren’t properly notified, the judgment may be void.
• State Exemptions: Use local laws that cap or forbid garnishment.
• Unconscionability: Extreme terms may be struck down.

Legal counsel can turn these defenses into shields, sometimes swords.

Proactive Strategies to Avoid Garnishment

Negotiating a Workout Before Things Escalate

Creditors want money, not court dates. Offer:

• Reduced daily payments tied to actual sales.
• A lump-sum settlement funded by a low-interest SBA loan.
• Temporary forbearance while you pivot the business.

Think of it like steering out of a skid, gentle, early, and with both hands on the wheel.

Alternative Financing When You Need Breathing Room

• Business Line of Credit: Rates are lower and payments flexible.
• Invoice Factoring: Sell specific invoices, not a blanket future.
• Equipment Refinancing: Unlock equity in machinery.
• Crowdfunding: Customers pre-pay for products, giving you capital without debt.

Each option is a different lifeboat, choose the one that suits your seas.

Working With an MCA Lawyer: When and Why

• Contract Review: Spot landmines before you sign.
• Defense Strategy: Raise usury and consumer protection claims.
• Settlement Negotiations: Lawyers speak the funder’s language.
• Vacating Judgments: File motions to reopen cases.

Hiring counsel is like bringing a seasoned guide on a mountain trek, you could go alone, but the cliffs are steep.

Protecting Personal Assets Beyond Wages

• Separate Entities: Keep business and personal finances apart.
• Homestead Exemptions: Many states shield primary residences.
• Retirement Accounts: ERISA plans are often untouchable.
• Insurance: Liability policies can cover certain claims.

Asset protection is the fireproof safe for your financial life.

Long-Term Impact on Credit and Business Health

Judgments surface on personal credit reports, dragging scores down 100+ points. Vendors pull back trade lines. New lenders raise eyebrows. Rebuilding resembles physical therapy after an injury, slow, repetitive, but effective with discipline.

Action Plan Checklist

1. Audit the Contract: Highlight personal guarantee clauses.
2. Monitor Cash Flow: Ensure daily drafts clear.
3. Communicate Early: Call the funder if trouble looms.
4. Gather Documentation: Bank statements, emails, payment logs.
5. Consult Counsel: Even a one-hour session can map escape routes.
6. Explore Alternatives: Replace the MCA with cheaper capital.
7. Guard Your Paycheck: Know state exemptions and HR protocols.

Conclusion

So, can an MCA garnish wages? Only after crossing a legal bridge built on judgments, confessions, and state rules. The good news: you have tools to raise the drawbridge. Act early, stay informed, and treat professional legal advice as your compass. Your future paychecks, and peace of mind, are worth the extra vigilance.

Frequently Asked Questions (FAQs)

1. How fast can an MCA start garnishing wages?

Without a judgment, they can’t. If a confession of judgment is signed, enforcement can begin in weeks, sometimes days, after filing.

2. Can I stop garnishment once it starts?

Yes. You can file a motion to vacate the judgment, negotiate a settlement, or claim exemptions, depending on state law.

3. Does bankruptcy halt MCA wage garnishment?

Filing Chapter 7 or 13 triggers an automatic stay that stops most collection, including garnishment, while the case is active.

4. Will garnishment affect my employees if I own the business?

No. Garnishment targets your personal wages, not payroll owed to others. But bank levies could freeze business accounts.

5. Are there federal limits on how much can be garnished?

Yes. Under Title III of the Consumer Credit Protection Act, creditors can take up to 25% of disposable earnings or the amount by which weekly wages exceed 30 times the federal minimum wage, whichever is less.