What Is A Confession of Judgment? Should I Sign One?
As you might expect, any financial agreement will be a trek into the frightening realm of legalese. If you aren’t up on your jargon–and even if you are–you’re likely to run into some unfamiliar terms. One of the more ominous ones you may encounter in the alternative lending world is the confession of judgment.
Is it as bad as it sounds? At the risk of spoiling the big reveal of this blog post, “yes.” While this post is no substitute for legal advice, we can provide some basic information about what a confession of judgment is, where you’re likely to encounter one, and whether it’s usually a good idea to sign one. Read on and we’ll try to break it down for you.
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Collateral & Personal Guarantees
When you apply for a loan or cash advance, your funder needs to prepare for the possibility that you will be unable or unwilling to pay back your balance in full. Usually, they will require some form of collateral. With traditional secured loans, this usually means putting up an asset you own, ranging from real estate to heavy equipment to a cash deposit. If you default on your loan or advance, your funder can then recoup some of their loss by keeping your collateral.
A confession of judgment isn’t collateral, per se. In fact, it’s usually paired with a form of unsecured “collateral” called a personal guarantee. A personal guarantee is essentially a promise to pay back your loan or MCA with personal assets should your business be unable to. If that gives you pause, it should; putting your personal assets at risk raises the stakes for you as a borrower since it’s removing the distinction between yourself and your business. Sounds like a pretty good deal for your funder, though, right?
On paper, it looks like a solid win, but enforcing a personal guarantee can be an ordeal for lenders. In many cases, they’ll need to bring a lawsuit against the guarantor to recoup their losses. That’s where the confession of judgment comes in.
Confession Of What?
So let’s say a funder is taking on a high-risk borrower for an unsecured loan or MCA. They think there’s a reasonable chance the borrower will default, but they don’t want to sink the money and time into a lawsuit to enforce the personal guarantee. As a condition for the loan or MCA, the borrower may have to sign a confession of judgment.
A confession of judgment allows the funder to go after the borrower’s personal assets as though they’d successfully received a judgment against them in court. That means the funder bypasses most of the due process the borrower normally be afforded: no trial, no hearing, no opportunity for the borrower to defend himself or herself. The funder simply needs to file the confession of judgment with their county clerk or appropriate agency. The courts will then inform the borrower that a judgment has been made against them.
As you can imagine, confessions of judgment are controversial. Not every state uses them (they’re more prevalent in the Mid-Atlantic states) and even among those states they may not be applicable to all financial contracts in your jurisdiction (most of those state only allow them for commercial transactions). They may be valid only for specific types of debt and for a specific amount of time. A confession of judgment can apply to debts currently outstanding or those that will become due in the future. Be sure to speak to a lawyer about any specific questions you have about how your jurisdiction adjudicates confessions of judgment.
Should You Sign A Confession Of Judgement?
No. Not if you can help it. You should always think long and hard before signing any of your legal rights away, and a confession of judgment is no different. Depending on your jurisdiction, it can severely impede your ability to protect yourself from collection efforts.
On the other hand, if you’re able to pay off your loan or MCA without any issues, the confession of judgment won’t ever really come into play. It’s only filed if your funder is unable to collect on your debt. If there’s no need to start a collection action against you, it’s simply another piece of paper you signed.
But again, you should really avoid signing one if you can possibly help it.
What If I’ve Already Signed One?
Don’t panic! If you’re making your payments on time, it’s unlikely that you’ll even need to think about your confession of judgment again. A confession of judgment has specific triggers that need to be met before it’s valid. In most cases, this trigger will be missing payments.
If your funder has actually filed a confession of judgment against you, the picture isn’t as rosy. In most states, however, you’re not completely out of options even if you reach this stage. You may still be able to negotiate a settlement with your funder, for example, or even have your confession of judgment vacated. The latter may require proving that the terms required to trigger the confession of judgment were never meant. It’s also possible for the borrower to be negligent in making it clear that you’re signing important rights away when they initially presented the confession of judgment to you. Be sure to speak with a lawyer to find out what solutions are possible in your case and your state.
How Do I Avoid Signing A Confession Of Judgement?
While personal guarantees are pretty common in the alternative lending market, confessions of judgment are significantly less so. It’s generally funders that deal with high-risk borrowers who will employ them, and even then they may not require them for every borrower. If your funder tries to get you to sign one, make sure you’ve exhausted all your other options before waiving your legal rights and putting your personal assets at risk.
Even if your credit rating or the age of your business has limited your options to merchant cash advances, you can still take your business to a funder who won’t lock you into quite so punishing terms.
Need some other options? We can get you started.