By revitalizing the antiquated Confession of Judgment, lenders supplying capital without collateral requirements have found a way to protect themselves from loss. And when it comes to signing one, what you don’t know can hurt you.
If you have ever obtained a business loan or Merchant Cash Advance (MCA), chances are good you signed a Confession of Judgment (COJ). Even if you’re familiar with the phrase, you may not know what it really means. And you’re not alone.
Creditors are using COJ clauses in their contracts as a form of personal guarantee and most borrowers don’t fully understand the ramifications of signing one. That’s if you even realized you signed one at all—in many cases, making the COJ clause obvious is not a legal requirement.
So what is a Confession of Judgment?
Sometimes called a cognovit note, a COJ is a document signed by a borrower that waives the right to due process if she does not fulfill her repayment obligations in the agreed upon time frame. So if the lender decides to take her to court, and the borrower has signed a COJ, she has essentially forfeited her right to defend herself. Many times, the debtor doesn’t even have to be notified of the court proceedings.
A typical Confession of Judgment reads, “the undersigned irrevocably authorizes any attorney to appear in any court of competent jurisdiction and confess a judgment without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgment.”
Confessions of Judgment have been around since the Middle Ages to enforce debts without the expense and headache of trial. And that’s about how long they’ve been criticized for their ability to be used in predatory ways against the unwary borrower. Most states abandoned their use in the middle of the 20th century because they deprived debtors of their assets without allowing them to present a proper defense. This is what led federal regulators to universally ban the use of COJ’s for consumer loans in 1985.
However some states, such as New York and Pennsylvania, still allow COJ’s for commercial loans, and these states are where most complaints get filed and judgments granted. Furthermore, most of the states that don’t allow COJ’s still recognize them from the states that do. This means it doesn’t matter in which state the business is physically located; they are still accountable for and subject to a judgment made in New York. And because the customers are businesses, not individuals, when things go badly, consumer protection laws don’t apply.
Why would anyone agree to sign a COJ?
That’s a good question. As we stated above, sometimes the language is couched in a loan agreement in such a way that the borrower doesn’t even realize it’s there.
Even when the clause is clear and conspicuous, people sign them because these types of loans and cash advances are available without collateral to consumers with less than perfect credit. In the aftermath of the 2008 financial crisis, obtaining a traditional loan became increasingly difficult for business owners. In dire straits, these consumers often do whatever it takes to gain access to capital, including taking high-cost advances and signing away their rights. After all, they intend to pay back the loan. It just so happens that sometimes they can’t.
So your lender filed a COJ. What now?
If you signed a COJ when you obtained your cash advance, your creditor can enter a complaint against you in court—often electronically—without having to give you advance notice. They get a judgment in their favor without litigation, allowing them to collect on their debts with incredible speed.
Meanwhile, you will be completely blindsided by the sweeping power such an action entails. The judgment can act as a lien on property and receivables and your lender can legally seize your assets before you know what’s happened.
Even if you are not actually at fault, or you missed one payment and went back to paying the next day, you have no defense. There is no judicial review and your lender does not actually have to present proof of your guilt. The process can all be done without warning and banks do not have to alert you before freezing not only your business accounts but in some instances, your personal accounts as well.
Before the use of confessions, it could take lenders months or years to get a judgment, and they stood little chance of collecting the entire amount. However, once the first confession was filed in 2012 in a New York court, collections suddenly became much easier. Alternative lenders now stood the chance of not only collecting the full amount but actually profiting by adding extra fees. Since then there have been over 25,000 judgments granted to MCA companies in New York.
How can your business get its money back?
Once signed, a judgment is almost impossible to overturn. Since the whole process is legal, and the lender can prove that the debtor signed, there’s little that can be done. At this point, the borrower needs a lawyer, but can’t afford to pay since he has no money. Furthermore, getting a ruling can take months—too long to save a desperate business. It’s a trap with no escape.
The best way out is to be informed. If you’re in desperate need of capital and think the only solution is to sign a loan agreement that contains a COJ, consult a professional to exhaust all your options. If you already have such a loan and are in danger of defaulting, call Second Wind Consultants before you miss a payment. A debt workout and business reorganization from Second Wind can save you and your company from bankruptcy and guide you toward sustainable success.