Confession of judgment is a legal term that refers to a type of contract in which a defendant agrees in advance to allow the plaintiff enter a judgment against him.
Table of Contents
What is a Judgment
A judgment is a court order that is a decision of a lawsuit. In debt collection matters, the judge may award the plaintiff, a debt collector or the original creditor a judgment against the debtor.
How does a Confession of Judgment Affect Business Owners
As a business owner, if you sign a confession of judgment and default on a loan or merchant cash advance, you are likely to have the judgement entered against you for the full amount claimed in the lawsuit. By utilizing the confession of judgment, the lender is able to garnish the debtor’s bank account and seize any unencumbered assets. While a confession of judgment is a tool often used in legal proceedings, it is oftentimes leveraged by lenders who cater to bad credit businesses.
Why do Merchant Cash Advance Lenders use Confession of Judgment
Although confessions of judgment have been for decades, it remains one of the most powerful weapons in a merchant cash advance lender’s arsenal simply because it fast tracks the collections process. Often, a judgment is entered on the same day that the complaint for confession of judgment is filed with the courts. That judgment is then recorded in any county in which the debtor may have a bank account or real estate. Because no notice is required, a summons served on the debtor isn’t required by law.
Are Confessions of Judgment Enforceable in New York?
Effective August 30, 2019, confessions of judgment executed after that date by lenders and debtors outside of the state are no longer enforceable. The New York Legislature amended the statute “to remedy abuses in the use of confessions of judgment by creditors against out-of-state debtors.”
Are Confessions of Judgment Enforceable in California?
First, in order for a confession of judgment to be enforceable, an independent attorney must sign the confession. This is required since the defendant is waiving his or her right to trial by jury.
In California, the courts do not allow such waiver without advice of counsel. Furthermore, counsel for the plaintiff cannot also be the counsel for the defendant, as that would present a conflict of interest scenario. In other words, should you not have representation and still sign a lender’s confession of judgment, a confession of judgment cannot be entered.
However, assuming that the confession is properly executed, it is an immediate judgment once filed with the court and therefore allows the plaintiff to use all tools for collection.
How to Avoid Signing a Confession of Judgment
In the same way that prenuptial agreements are executed in advance of a divorce, a confession of judgment is executed prior to a loan or a merchant cash advance’s default. As mentioned earlier in this article, confessions of judgment are most notably used by lower-tier lenders who have ample reason to believe that the debtor may have difficulty paying back back the loan or merchant cash advance.
Since an executed confession of judgment gives your lender a de facto default judgment you may want to factor this into your decision to execute the business loan or merchant cash advance contract.
Did I Sign a Confession of Judgment
If you’ve signed a lender’s confession of judgment, you may have options. Though the courts have ruled that such a process constitutes a defendant waiving their Constitutional rights, namely their right to due process, there are strict requirements in order for the confession of judgment to be enforceable.
Which Small Business Lenders Require Confessions of Judgment?
At the time of this article’s publication, the only small business lender that still requires a confession of judgment was Yellowstone Capital Partners also known as Fundry
KEY TAKEAWAYS
- Confession of judgment allows a plaintiff to bypass the necessity of a lawsuit when settling a dispute.
- Some lenders may require a business owner to sign a confession of judgment in addition to a promissory note. Generally, the most aggressive lenders use a COJ as a tool to collect on a lawsuit.
- A confession of judgment is a statutory instrument that can be used to seize a debtor’s bank account or property.
- Confession of judgments executed after August 30, 2019, by parties who reside outside of New York State are no longer enforceable after that date.
- You may not want to execute a loan agreement or merchant cash advance with a lender that forces you to sign a confession of judgment. While many lower-tier lenders may require this form to be signed, there are other lenders that have moved away from using this document to protect their interests in the event of a default.
- Yellowstone Capital Partners also known as Fundry is the only small business lender that still requires a signed confession of judgment for funding.
Doug
2 months ago
Confession of Judgment in New York seems to be something of the past. I don’t see many working capital lenders using this as a practice any longer. This used to be a standard practice for bad credit business loan lenders like Pearl Capital (www.pearlcapital.com), Yellowstone Capital (www.yellowstonecap.com). While Confession of Judgment is still a standard tool used in business and corporate law, California is another state like New York where confesión of judgment is being scrutinized by judges and state legislatures.
ReplyAileen Russel DDS
2 months ago
LOL...I don't know much about commercial lenders using Confession of Judgment documents, but I do know that this heavily used in the construction industry.
ReplyAlanis Ortiz
2 months ago
Yeah, it's used a lot in construction deals, but from what I've seen, this type of thing was outlawed in the 1980s. No consumer lenders use Confession of Judgments in their contracts any longer.
ReplyLayla Larson
2 months ago
Alanis, this article isn't about consumers, it's about SMBs. And yes, commercial lending involving SMBs still use confession of judgment. I don't know if merchant cash advance lenders due, but it's still adopted by larger commercial lenders. I do understand that's it's becoming less and less common, however. Since NY has changed their state law, it's probably just a matter of time before other states adopt this same change. It's really gross stuff, tbh.
ReplyMiss Adell Skiles
2 months ago
It's such a crock. I've heard how this works. Essentially, a merchant cash advance lender will approve a small business for a loan, which they call and advance so they're exempt from usury clauses in state laws. They'll have the business sign the working capital loan documents via Docusign so you can't really read the documents...whatever happened to sending docs via email or fax anyhow. The business owner signs them and in some states you can use an electronic notary service for the confession of judgment. Documents come back to the lender and the working capital is released to the businesses' business checking. Daily payments are made, but should the business fall on hard times and actually. default the lender can simply bring the confession of judgment document to the court clerk, get a default judgment and go to banks local to the business and serve them. Even if the business owner has moved his money to a different bank, these collectors are fierce. They'll find the business' new business account and freeze it and then liquidate it.
ReplyLinda Bernier
2 months ago
Aileen, did your practice sign a confession of judgment?
Reply