Confession of Judgment

Published August 17, 2020 by WC Team

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
How does a Confession of Judgment Affect Business Owners
Why do Merchant Cash Advance Lenders use Confession of Judgment
Are Confessions of Judgment Enforceable in New York?
Are Confessions of Judgment Enforceable in California?
How to Avoid Signing a Confession of Judgment
Did I Sign a Confession of Judgment
Which Small Business Lenders Require Confessions of Judgment?
KEY TAKEAWAYS

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.
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37 Comments

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.

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Aileen 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.

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Alanis 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.

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Layla 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.

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Miss 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.

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Linda Bernier

2 months ago

Aileen, did your practice sign a confession of judgment?

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Robert Espinoza

2 months ago

A confession of judgment is the admission by a Defendant to a liability for a debt before even having a trial. It’s basically a contract where a Defendant agrees to let the Plaintiff enter a judgment against him or her. It may only be used when no action has been commenced in court. Do not sign a contract that includes a confession of judgment without first consulting with an attorney licensed to practice law in a state where the contract has been entered into.

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Rodney

2 months ago

My machine shop is in New Jersey, but I signed a confession of judgment and i think the bank is in New York. I had it notarized at my bank in Hoboken. Is the confession of judgment in New York enforceable? I was told not to sign it but it was the only business loan I could get. Now what?

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Evangeline Halvorson

2 months ago

Sorry to say, but I think it’s enforceable. I think they can export the confession of judgment from NJ to NY. When was it signed?

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Sade Hernandez

2 months ago

I'm looking for a business loan and unfortunately for me, I don't have the best business credit. I guess my personal credit is mediocre (divorce and some medical bills that I didn't pay). I want to get a merchant cash advance since my bank isn't really interested in helping me. How should I go about asking them to not include a confession of judgement? I'm located in Salinas, Calfornia. I don't really have many options and I get that but signing this confessiono of judgement form really freaks me the hell out.

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Alyana Huber

2 months ago

What is this all about? I've had four merchant cash advance loans and never had to sign a confession of judgment.

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Mr. Demarcus Kutch

2 months ago

Alyana, you may have signed a confession of judgment but didn't even realize that you did. It's funny. These are sorta of baked into the working capital loan documents. For that reason, many small business owners don't even realize what they're signing. Plus to make matters worse for the small business owner, these are generally predatory loans in nature; they're bad business credit or bad personal credit business loans and therefore the business owner is left to feel lucky that they were approved and is urged to quickly sign the documents. It's a high pressure sale to be sure. If you think you didn't sign a COJ, I encourage you to print out your working capital loan documents and read every word of every paragraph on every page.

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Fiona Hinkley

2 months ago

I don't think this is even legal. I've read up about this and it sounds like merchant cash advance lenders aren't doing this any more because states are finding that merchants are being set up to fail by these sneaky lenders. Dare we call this predatory lending?

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Kay Cousins

2 months ago

Yeah, this is pure BS. Don't sign a confession of judgment. Borrow from friends or family if you have to. Avoid these scams

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Ken Haim

2 months ago

I'm an attorney licensed to practice in NY. I can tell you first hand that confessions of judgment executed after August 30, 2019 by parties that reside outside of the State of New York are no longer enforceable. The ameneded CPLR § 3218 provides that the confession must state the New York county in which “the defendant resided when it was executed." Obviously, therefore, if the business or business owner reside outside of the State of New York, and a confession of judgment was executed after 08/30/2019, it would no longer be legally enforceable.

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Ned Atkins

2 months ago

From what I've seen most lenders do not use confession of judgment

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Evelina Gonzalez

2 months ago

The New York Legislature expressly stated that it amended CPLR § 3218 in order “to remedy abuses in the use of confessions of judgment by creditors against out-of-state debtors.” From the research that I've done, once a state as influential as New York is bold enough to amend such a statute, it's only a matter of time before other states ammend or add reciprocal statutes. It would seem, therefore, that times up for predatory lenders. Let's hope that payday lenders and car title lenders are the next industries to get the same type of govermental attention.

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Nick Freitas

2 months ago

A confession of judgment was originally intended to only be a procedural device for civil litigation. If you refer to section 3218 of New York’s Civil Practice Law and Rules (CPLR), a confession of judgment allows a party to sign an affidavit prior to default, confessing that he owes the other party a certain amount, and authorizing the beneficiary party to file the affidavit with a New York state County Clerk in order to obtain a judgment against the authorizing party in that amount.

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Kennedi Bode

2 months ago

Why on God's green Earth would someone sign a document ahead of time confessing that they defaulted? Maybe more importantly, why would a reputable company ask that such a form to be signed? Lastly, why would a state or federal government allow a law that so heavily favors large corporations to be put into law. It's time to defund the government and put the law back into the hands of the populous. Our Constitution is at risk, as is our court system. You watch, should the executive branch fall to the Bidens, everything will be for sale just like what happened post-Gorbachev. If you think Confession of Judgment is shady, wait until you see his executive orders and what he can pass with a socialist congress and senate. It's funny. I see celebrities like Joe Rogan saying, "move to Texas." Well, I'm a Texan and this whole state is under duress. With all of these friggin' libtards moving to our state, it's will soon fall to the Dems and we'll never again see another Republican president. The republic is at stake, my friends. There's no coming back once the electoral college is over-run with blue votes.

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Krista Fuller

2 months ago

A confession of judgment is a private admission by the Defendant to liability for a debt without having a trial. When the looting starts the shooting starts.

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Zain Lugo

2 months ago

Do most banks try to pull this shit? Or is it more like a payday lender thing?

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Jarvis Nichols

2 months ago

That's what I'm thinking too. I've had a business line of credit and a business term loan before and neither had me sign a confession of judgment. From waht I recall, both were standard contracts and I didn't even need a notary.

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Sienna Barr

2 months ago

COJ aren't enforceable in New York if you don't live or have a company there. I wouldn't worry about it.

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Fiora Yang

2 months ago

You're right, Sienna. In certain cases, a Plaintiff may indeed seek money from the Defendant by entering a Confession of Judgment. However, New York did ammend their law to the extent that a business must reside in a New York State county in order for the confession of judgment to be enforceable if it was in fact signed by both parties after August 30, 2019. This ammendment was in response to renegade business lenders using a confession of judgment as a tool to force a default and the subsequent collection, without using the litigation to come to a mutual settlement.

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Ben Yang

2 months ago

Do not sign a confession of judgment (COJ). A COJ violates your right to due process according to the constitution.

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Mrs. Athena Hamill II

2 months ago

Ricky, if NY State has amended their statute, you’re 100% correct-other states will soon follow. The confession of judgment argument is pure garbage anyhow.

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Martin Ritter

2 months ago

CCP § 1132 needs revising. California needs to follow New York State and revise their confession of judgment statute.

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Darren Blackmore

2 months ago

Check Code of Civil Procured (CCP) § 1132 provides that "A judgment by confession may be entered without action either for money due or to become due, or to secure any person against contingent liability on behalf of the defendant, or both, in the manner prescribed by this chapter. Such judgment may be entered in any court having jurisdiction for like amounts."

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Margie Rassmussen

a month ago

The State of California's Confession of Judgment statute(s) were enacted in 1851 and then codified in 1872. They follow common law practice with the exception that they do not allow an attorney to confess judgment on behalf of the defendant.

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Layla-Rose Greenberg

a month ago

Confession of Judgment is not allowed in consumer finance transactions.

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Adnaan Khodari

a month ago

A California Confession of Judgment is only enforceable if the following is true: 1) the debtor's attorney files a signed certificate asserting that the attorney has explicitly examined the judgment, advised the debtor of their rights and defenses and has advised the debtor to proceed with the confession of judgment (COJ) and 2) the debtor signs a written statement authorizing the entry of said judgment whereby they state the facts to support the debtor's liability and the exact sum confessed to.

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Dr. Esther Olson II

a month ago

So, what if you took a loan or a merchant cash advance, meaning in my case the old owner took it out. I’ve recently purchased the business and have been making the daily payments. In looking back at the paperwork, he did in fact sign a confession of judgment but since he’s the old owner and I’m the new one (changed ownership with Secretary of State of California and the IRS), can our company bank account be liquidated should I default? Seems unfair if that’s true.

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Danika Von

a month ago

So, Esther, the quick and dirty is yes. Since the old debt is attached to the company and not the individual, and you’re the new owner of the same entity, yes, it holds. You said you contacted the IRS; was that because you have a new federal tax ID? That may change things. Also, if you changed the corporate name, not the DBA, that may be different as well. From the I’ve seen (legal assistant), a material change in ownership whereby the original structure has been modified to the extent that the IRS has indexed the business with a new tax ID, you may indeed be the owner a an unrelated entity and therefore should you default on a commercial debt obligation where a confession of judgment was signed, it may not hold water in court.

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Ricky Bevan

a month ago

I'm guessing that since New York State has ammended PLR § 3218, other states will follow. California Code, Code of Civil Procedure - CCP § 1132 is the statute you'll want to keep an eye on.

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Mervin Koepp DVM

a month ago

Ricky, if NY State has amended their statute, you’re 100% correct-other states will soon follow. The confession of judgment argument is pure garbage anyhow.

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Elroy Rolfson

2 months ago

Here's a link to an interesting article on confession of judgment-it's from Law.com: https://www.law.com/newyorklawjournal/2020/04/17/covid-19s-hidden-legal-crisis-for-small-businesses/?slreturn=20200920194653

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Grayce Adams

2 months ago

I got a better one on confession of judgment. It's more recent and it's from Bloomberg.com https://www.bloomberg.com/graphics/2018-confessions-of-judgment/

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