What A Confession Of Judgement Is & Why You Should Never Sign One To Get A Business Loan
Any financial agreement will be a trek into the frightening realm of legalese. For small business owners, who might lack a team of lawyers to fall back on, legal speak can be especially daunting.
As such, 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, the answer is “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 through to get the breakdown on confessions of judgment.
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What Is A Confession Of Judgment?
In the business world, a confession of judgment is a legal document that a borrower signs when taking out a business loan or commercial agreement. A confession of judgment will place the liability and damages on the borrower, allowing the lender to circumvent the right to due process in case debt goes unpaid.
This means that the borrower cannot dispute claims in the future. You’ll most commonly see a confession of judgment if you are working with a merchant cash advance provider or some form of alternative lending.
In some situations, you may see a confession of judgment referred to as a cognovit note.
How A Confession Of Judgment Works
While a Pennsylvania lawyer called confessions of judgment “legal relics” way back in 1998, this form of lender strong-arming still exists to this day. Let’s take a look at how a confession of judgment may come about in a commercial setting.
When a business needs a fresh infusion of cash, it will often look for a loan or a merchant cash advance. Upon finding a lender, the business must sign various documents to get set up for the loan; included in these documents could be a confession of judgment.
After all the paperwork is signed, the lender will send the business money, which needs to be repaid. If the business misses a repayment (or the lender claims that the business missed a payment) the confession of judgment will come into play.
In this scenario, the lender can request court approval of the judgment on the grounds that the business has defaulted on the loan. Should the court agree that the supposed default has happened, the lender can then force the business’ bank to freeze its associated accounts and hand over the frozen funds to the lender.
Why You Should Never Sign A Confession Of Judgment
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.
In particular, lenders may be able to freeze your bank account and seize your cash without notice. Additionally, even starting the legal process for getting your money back may be nigh impossible — most lawyers won’t be keen to work with customers who have just suffered a financial catastrophe.
On the other hand, if you’re able to pay off your loan or merchant cash advance without any issues, the confession of judgment shouldn’t ever come into play. It can only be filed if your funder is unable to collect on your debt. If there’s never a need to take collection action against you, a confession of judgment is simply an innocuous piece of paper. All that said, you should avoid signing one if you can possibly help it — it’s not worth risking your business’ future.
Confessions of judgment have proved to be big business in recent years. According to an exposé by Bloomberg Businessweek, lenders raked in $1.5 billion from over 25,000 judgments between 2012 and 2018 in the state of New York alone. The Empire State had been especially fertile ground for predatory lenders because confessions of judgment could be filed from anywhere in the country until 2019.
It’s also worth noting that even accounts in good standing can be hit with penalties triggered by a confession of judgment. As shared in the above-linked expose, a Florida couple lost over $50,000 — and their real estate agency — after a lender filed a confession of judgment, despite the fact that bank records showed the couple had never missed their $800-a-day loan repayments. Elsewhere, a Georgia contractor presented evidence in court that a lender’s filed confession was a total fabrication.
Luckily, fewer and fewer states are allowing confessions of judgment, or are moving towards limiting a confession’s power. New York state, spurred on in part by that Bloomberg article, no longer enforces confessions of judgment made by parties located outside the state. Others, such as Virginia, require that confessions of judgment are clearly labeled before signing. A few, such as Florida and Massachusetts, even ban them outright.
What To Do If Your Lender Asks You To Sign A Confession Of Judgment
While personal guarantees are pretty common in the alternative lending market, confessions of judgment are significantly less so. It’s generally only funders that deal with high-risk borrowers that employ them, and even then they may not require them for every borrower.
If a 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 assets at risk. There are a number of different types of business loans worth learning about. By hunting down other options, you may be able to find a suitable solution that won’t require you to sign a confession of judgment.
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. You can glean more information — as well as tips on finding a trustworthy provider — by checking out our deep dive on merchant cash advances.
What To Do If You’ve Already Signed A Confession Of Judgment
Don’t panic! If you’re making your payments on time, it’s unlikely that you’ll ever 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.
Know Your Rights Before Signing
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.
Stuck with a lender who wants you to sign a confession of judgment? Check out our article on the best business loans to get you started with some other options. And — above all else — if you wind up going with a lender that does require a confession of judgment, make sure to consult a lawyer before actually signing any documents.