In short, no. Failure to pay an MCA is a violation of a civil contract, and the law does not consider this a crime. The only ways to jail are fraud, in getting the advance or afterwards, and ignoring the court’s orders after a judgment.
Is defaulting on a merchant cash advance a crime?
Failure to repay an MCA is not a crime in New York, Pennsylvania, Texas, Florida, or California. Four of them say so in their constitutions. Texas’s constitution is the clearest, saying in article I section 18, “No person shall ever be imprisoned for debt.” California’s constitution says in article I section 10, “A person may not be imprisoned in a civil action for debt or tort.” Florida’s constitution and Pennsylvania’s constitution say the same thing, with an exception for fraud.
New York’s larceny statute says that intent to defraud “may not be established by or inferred from the fact alone that such promise was not performed.” See New York Penal Law 155.05(2)(d). Pennsylvania’s theft by deception statute is similar. See 18 Pa.C.S. 3922(a)(1). If you signed in good faith but are now behind because revenue went down, that is a matter for civil courts only.
How can defaulting on a merchant cash advance be considered fraud?
Default only becomes a crime if you lied to or hid something from the funder, either before you were funded or afterwards. In New York, knowingly giving a materially inaccurate written statement of your financial condition or ability to pay, or presenting an old statement as current, is a class A misdemeanor, punishable by up to 364 days in jail. See New York Penal Law 175.45. In Pennsylvania, a false written statement “for the purpose of obtaining property or credit” is a third degree felony over $2,000. See 18 Pa.C.S. 4107(a)(6). Calling an MCA a purchase rather than a loan doesn’t help, because the statute covers property too. Fraud over interstate wires can be federal wire fraud, with up to 20 years in prison. See 18 U.S.C. 1343.
After default, the risk shifts to collateral. In Pennsylvania, if you destroy, remove, conceal, encumber, transfer or otherwise deal with property subject to a security interest or after levy, with intent to hinder enforcement, that is a second degree misdemeanor, punishable by up to 2 years. See 18 Pa.C.S. 4110. New York’s law is similar. See New York Penal Law 185.05. MCA fraud prosecutions are rare, and the ones worth worrying about involve provable lies, not missed payments.
| What you did | Civil or criminal? | Worst that can realistically happen to you |
|---|
| Revenue dropped and you can’t pay | Civil | Lawsuit and money judgment |
| You stopped the ACH or closed the business | Civil | Breach claim, money judgment, bank levies |
| You submitted fake bank statements to get funded | Criminal | New York: class A misdemeanor; Pennsylvania: felony if over $2,000 |
| You sold liened equipment after defaulting to beat the funder | Criminal | Pennsylvania: second degree misdemeanor, up to 2 years |
| You ignored a post-judgment subpoena or restraining notice | Contempt of court | Fines, warrant, jail until you comply |
Can you go to jail for ignoring a court order after an MCA judgment?
In New York, if you don’t pay a money judgment, you can’t be held in contempt for that alone, because it is collected by levies and garnishments. See New York Judiciary Law 753(A)(3). But you can be held in contempt for ignoring the orders that follow the judgment.
After judgment, a funder’s lawyer can serve a restraining notice under CPLR 5222 (no judge required), which forbids you to transfer or interfere with your property until the judgment is satisfied or vacated. The information subpoena is served on you by certified mail, and you have seven days to answer. Disobeying either one, or swearing falsely in your answers, is punishable as contempt of court under CPLR 5251. If you ignore a lawyer-issued subpoena, the funder asks a judge to compel compliance, with a penalty of up to fifty dollars plus damages, and if you still don’t obey, the court can issue a warrant directing a sheriff to take you into custody and commit you to jail “until he or she submits to do the act.” See CPLR 2308(b). Judgments in New York are enforceable for twenty years, so ignoring them does not get you very far.
Pennsylvania’s version is governed by Pa.R.C.P. 3117, which lets the creditor depose you about your money and property. Courts can hold parties in contempt for disobeying lawful process. See 42 Pa.C.S. 4132. You should answer truthfully and on time.
Can an MCA funder have me arrested or sent to jail for not paying?
They cannot have you arrested for not paying. Only a prosecutor can file criminal charges. Threats to put you in jail for nonpayment may violate state extortion and coercion statutes. The federal Fair Debt Collection Practices Act does not apply to MCAs, however, because it covers only consumer debts for personal, family, or household purposes. See 15 U.S.C. 1692a.
Frequently Asked Questions
Can I be jailed for not being able to pay a judgment an MCA funder gets against me?
No. You can be jailed for civil contempt only as a coercive device, and you retain the keys to the cell by doing the act you were ordered to do, such as appearing, answering, or not moving restrained funds. See Turner v. Rogers, in which the Supreme Court required findings about a person’s ability to comply before jailing him for civil contempt.
How long can I be jailed for civil contempt in New York?
If you fail to do something you can still do, such as answering deposition questions, you can be jailed until you do it and pay a fine. Otherwise, Judiciary Law 774 caps the jail term at six months. The default is three months when the fine is under $500 and six months when it is $500 or more, and the court must consider release at least every ninety days.
Is it theft for me to stop ACH debits on my account?
Not by itself, though a funder might point to Pennsylvania’s theft by failure to make required disposition of funds received, 18 Pa.C.S. 3927. Applying it to ordinary nonpayment is a stretch. Hiding or selling collateral to beat the funder’s lien or levy is where it starts to look criminal.
What happens if I give false answers on an information subpoena?
CPLR 5251 provides that a person who swears falsely in an examination or in written answers may be punished for contempt of court. If you gave the funder false documents at signing, speak to a criminal defense lawyer before you answer the subpoena or negotiate a settlement.