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Understanding the Confession of Judgment (COJ)

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Content was accurate at the time of publication.

A confession of judgment (COJ) is a legal agreement that, once signed, indicates a borrower accepts liability for their loan, waiving all legal defenses if they default. A COJ, sometimes called a cognovit note, is one of the documents that could slip through the cracks when signing your loan paperwork. Make sure you understand what exactly a COJ is and how you can avoid loans that require one.

What is a confession of judgment?

A confession of judgment (COJ) gives lenders the right to enter a legal judgment into public record without a lawsuit. The lender doesn’t need to take you to court to prove you violated the loan agreement because a signed COJ essentially means you’ve already admitted guilt.

A judgment is a debt you owe due to a lawsuit. If anyone, lenders included, sues you for money and you lose, a judgment is filed against you and you must pay the money the company says you owe. Although judgments do not appear on your personal credit report, they are public record and could cause you problems on your business credit report. Lenders may also decide to perform a public records search on their own before approving you for financing.

Protections against COJs

The Federal Trade Commission (FTC) bans COJs for consumer contracts but not for commercial contracts. Many states have stepped in to regulate COJs, but they cannot necessarily shield their residents from confessed judgments entered in other states.

Who uses COJs?

Certain types of financing from alternative lenders, such as equipment loans and merchant cash advances, may come with a COJ.

Equipment financing companies

COJs on equipment financing allow lenders to quickly retrieve pieces of equipment if a borrower defaults, rather than waiting through court proceedings to collect their property, said Elizabeth Milito, a lawyer with the National Federation of Independent Business.

Merchant cash advance providers

Merchant cash advance (MCA) providers use COJs to avoid building up legal fees that could exceed the amount of the original advance. MCA providers may enforce the COJ only when fraud is suspected.

Commercial landlords

Commercial leases could include COJs as well, Milito said. If you’re late paying rent or miss a payment entirely, a COJ would allow your landlord to immediately evict your business from the property.

COJs are also commonly used when friends or family loan money to each other, said Art Steele, whose Virginia-based law firm works with small businesses. Traditional banks and SBA lenders generally don’t use COJs because they have other methods of securing loans, like requiring collateral.

Why require a COJ?

For lenders, a COJ significantly reduces the resources required to chase down a borrower that has defaulted on their payments.

When a borrower breaches a contract, lenders typically have to take the borrower to court to prove they did not adhere to the terms set in the business loan agreement, usually meaning the borrower didn’t pay back the loan. For small amounts, a judge can settle the lawsuit quickly in small claims court. For larger amounts, lenders must file a complaint and then attend multiple hearings before potentially going to trial. The process could take more than six months, during which time the lender would continue to pay legal fees.

“If you have a confession of judgment, you skip all of that,” Steele said.

How a confession of judgment works

A lender would require a borrower to sign a confession of judgment at the beginning of the lending process along with all other required documents related to the loan terms. If you violate the terms at any point, the confession of judgment gives the lender the ability to go to their local courthouse and file a judgment against you without a trial.

If the business as an entity signs a confession of judgment, then the lender could only go after business assets to pay the debt. But if an individual business owner signs the document or personally guarantees the small business loan, then the lender has the right to seize personal assets. When you sign a COJ with your own name, you stand to lose your business or your belongings, or both, if you fail to pay back the money borrowed.

Check your state’s regulations

Confessions of judgment are regulated at the state level, and acceptable uses of COJs vary by location. For example, New York state limited the use of confessions of judgment by out-of-state debtors. COJs are permitted in just a handful of states, including Illinois, Maryland, Michigan, Minnesota, New Jersey, Ohio, Pennsylvania, Texas and Virginia.

Confession of judgement example

A confession of judgment typically appears as a form or a clause in your loan paperwork. It may be a statement that includes:

  • Your name.
  • The lender’s name.
  • The amount of money you’re borrowing.

You would sign the form or clause, waiving your right to legal defense against the judgment. The confession of judgment would have no effect on you if it is not filed in court. But if you violate your loan agreement, the lender could then immediately file the signed document. You can view Virginia’s confession of judgment form as an example of what you may encounter.

Should you sign a confession of judgment?

You are not required to sign a confession of judgment for a creditor or lender, but if you don’t, the lender may reject your application. As mentioned earlier, certain types of business financing, like equipment loans and merchant cash advances from nonbank business lenders, are more likely to come with confession of judgment. If you are uncomfortable signing a COJ, you could ask the lender to remove it from your loan agreement. Or, you could continue shopping for business funding to find a business loan from a traditional lender, which may be less likely to ask you to sign a confession of judgment.

Negotiate to remove a confession of judgment

If you are able to negotiate a financing arrangement without a confession of judgment , the lender would have to take you to court to pursue a judgment if you fail to repay your debt. The lender may tack the court costs and attorney fees onto your original debt, increasing the total amount you’d owe.

What to expect if your lender files a confession of judgment

The only thing you can do after a judgment has been filed against you is pay the money you owe. But there are a few strategies you could follow to lessen the damage of a confession of judgment:

  • Appeal the original ruling. You could file a motion to appeal the court’s ruling if the lender did not follow proper procedures. If your appeal is successful, your judgment would be labeled as a vacated judgment.
  • Dispute inaccuracies with the court. The judgment may be removed from your credit file if the court did not have certain information when reporting your judgment to the credit bureaus. You would need to dispute inaccuracies, such as clerical errors or if you had actually paid your debt to the lender.
  • Pay your debt. Paying what you owe would lessen the impact of the judgment. State law may require the judgment to be removed once you pay off the debt.

How to avoid a confession of judgment in the first place

When searching for business funding, be sure to research the laws in your state regarding confession of judgment. Also look into state regulations where the lender is located. You could find out whether the lender would be permitted to include a COJ in your loan agreement.

Another way to avoid the consequences of a confession of judgment would be to have a lawyer look over the documents a lender asks you to sign. An attorney could negotiate more favorable terms to protect you in the contract and loan agreement.