Confession of Judgment: What Is It and How Does It Work?
Signing a confession of judgment can put your business and its assets at risk if you default. If a lender is asking you to sign one, consider it a red flag.
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Confessions of judgment are legal documents used by some lenders that allow them to easily seize your assets without a court hearing if you default on a loan.
They’re allowed in nine states: Illinois, Maryland, Michigan, Minnesota, New Jersey, Ohio, Pennsylvania, Texas and Virginia.
Confessions of judgment aren’t used by most reputable lenders. Think twice before signing one.
What is a confession of judgment?
A confession of judgment is a legal document that may be part of a small-business loan agreement. By signing one, you allow the lender to collect the debt if you default on the loan without going through the usual court process.
This means:
You may not be notified when one has been filed.
You won’t have the opportunity to defend yourself in court.
The lender can immediately begin taking your assets to recover what you owe.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
How does a confession of judgment work?
A confession of judgment, sometimes called a cognovit note, doesn’t affect you until it is filed in court by your lender and an attorney. That means there’s a chance it will never come into play as long as you make on-time payments and pay off your debt.
If you sign one and then default on your loan — which generally means you’ve stopped making payments — your lender can enter the signed judgment against you in court without notifying you. You won’t be able to defend yourself in court or, in most cases, work with your lender to come up with a different solution
Essentially, a signed confession of judgment acts as an automatic guilty plea to a lender’s legal complaint. Once entered in court and signed by a judge, it allows the lender to collect on any collateral or other assets. The lender may even place a lien on your business’s property and receivables.
Which states allow confessions of judgment?
While confessions of judgment are outlawed for consumer loans, they are still legal for business loans in nine states:
Illinois
Maryland
Michigan
Minnesota
New Jersey
Ohio
Pennsylvania
Texas
Virginia
What types of lenders use confessions of judgment?
Even in states where they’re legal, most lenders don’t use them.
Confessions of judgment are often associated with predatory lending practices. You may come across one when dealing with less-regulated lenders, especially merchant cash advance companies or some equipment financing companies.
Some commercial landlords may use them as well.
Why do lenders ask for a confession of judgment?
Confessions of judgment make it easier for lenders to collect on debts. They don’t have to spend time and money filing a lawsuit through the normal legal process if you default.
In theory, it can be a way for a lender to test a prospective borrower’s intention to repay the debt since it only becomes legally valid once it’s filed with a court.
What to do if you’ve signed a confession of judgment
You should avoid signing a confession of judgment, if at all possible. If you think signing a confession of judgment is unavoidable or if you have already signed one, there are a few steps you can take.
Have a lawyer look at your business loan agreement. An attorney can help you understand what you’re getting into and your avenues out, if necessary.
Make sure you can afford the loan. To lower the risk of defaulting on a business loan, avoid any loan you’re not confident you can pay back. Talk to a financial professional or loan officer, and use a business loan calculator to run some numbers.
Understand what “default” means in your agreement. A loan default triggers the conversion of a confession of judgment into an actual court-ordered judgment. But not all lenders share the same definition of default. Make sure you know exactly what it means according to your loan documents so you can avoid it.
Ask the lender to remove the clause. If you feel you’re out of loan options or won’t qualify with other lenders, try speaking with your loan officer about removing the confession of judgment. If the lender has your best interest in mind, it’s something it may consider, especially if there are other ways to secure your loan.
