Confession of Judgment: What It Is and How It Works
A confession of judgment (COJ) is a clause in a business loan agreement that allows a lender to obtain a court judgment against the borrower without filing a lawsuit or going to trial. If the borrower defaults, the lender can go directly to the courthouse and have a judgment entered, skipping the entire legal process.
A confession of judgment — 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 a confession of judgment is and how you can avoid loans that require one.
- A confession of judgment is a clause in a business loan agreement that lets a lender obtain a court judgment against you without a lawsuit or trial if you default.
- You are not required to sign a confession of judgment and can negotiate to have it removed.
- The FTC bans confessions of judgment in consumer contracts, but they remain legal in commercial contracts in several states.
- If a confession of judgment is filed against you, you may be able to challenge it by filing a motion to vacate with the court.
- Judgments don’t appear on personal credit reports but may show up on business credit reports and in public records.
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. This means that 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 court-ordered debt. If a lender sues you and wins, a judgment is filed against you and you must pay what the court says you owe.
Judgments don’t appear on your personal credit report, but they are public record. If a lender performs a public records search alongside your business credit report before approving you for financing, a judgment could hurt your application.
How a confession of judgment works
A lender can ask a borrower to sign a confession of judgment at the beginning of the lending process. Sometimes, it may be lumped in with other loan paperwork during origination. If you violate the loan 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 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.
That means that when you sign a confession of judgment with your own name, you stand to lose your business or your belongings — or both — if you fail to pay back the money borrowed.
A confession of judgment doesn’t mean you’re confessing to wrongdoing. Instead, you’re agreeing in advance to accept liability if a dispute arises, effectively waiving your right to defend yourself in court before any default has actually occurred.
The “confession” refers to the fact that you’ve preemptively accepted the lender’s claims rather than requiring them to prove a breach. If the lender later claims you’ve violated the agreement, the signed confession allows them to skip the legal process entirely.
Should you sign a confession of judgment?
In general, it’s best to avoid signing a confession of judgment whenever possible. But the decision depends on your specific situation and the terms of the agreement.
When it may be unavoidable:
- You’ve reviewed the clause with an attorney and understand the risks.
- The lender offers favorable terms that outweigh the potential downside.
- You have strong cash flow and a reliable plan for repayment.
- The confession of judgment applies only to your business entity, not to you personally.
When to walk away:
- The lender pressures you to sign quickly or discourages you from consulting an attorney.
- The confession of judgment requires a personal guarantee, putting your personal assets at risk.
- The clause is buried in fine print or wasn’t clearly disclosed.
- You’re unsure whether you can meet the repayment terms.
- The lender won’t negotiate any modifications to the clause.
Federal and state regulations on confessions of judgment
The Federal Trade Commission (FTC) bans confessions of judgment for consumer contracts but not for commercial contracts, which means small businesses can still sign them. Multiple states have stepped in to regulate confessions of judgments, but they can’t necessarily shield their residents from confessed judgments entered in other states.
Which states allow confessions of judgment?
Most states prohibit confessions of judgment in business loan contracts. The courts may consider a contract void if it includes a confession of judgment. In a few states, it’s even illegal to ask someone to sign a contract that includes one.
That said, several states permit confessions of judgment in commercial contracts, including:
- Illinois
- Maryland
- Michigan
- Minnesota
- New Jersey
- Ohio
- Pennsylvania
- Texas
- Virginia
In some states, a confession of judgment is only enforceable if certain requirements are met. For example, Ohio business contracts must include a clearly visible disclosure.
Finally, your state of residence may not be the state where the loan contract is enforced, and another state’s laws may apply to your situation. For example, Florida prohibits confessions of judgment, but Florida courts will honor a valid confession of judgment issued in another state.
If you’re unsure whether a COJ is legal or enforceable, consult a lawyer for advice.
Who uses confessions of judgment?
Lenders may include a confession of judgment in the loan agreement for certain types of financing, including:
- Equipment financing: Some lenders may include a confession of judgment in an equipment financing contract, allowing for seizure of the equipment without lengthy court proceedings if the borrower defaults. Likewise, equipment leasing companies may include a confession of judgment in order to quickly recoup the equipment.
- Merchant cash advances: Merchant cash advance (MCA) providers use confessions of judgment to avoid building up legal fees that could exceed the amount of the original advance.
- Commercial leases: Some landlords may require you to sign a confession of judgment when renting a commercial space. If you’re late paying rent or miss a payment entirely, this would allow your landlord to immediately evict your business from the property.
- Family loans: Confessions of judgment may be used when friends or family loan money to each other. They prevent loved ones from going to court to dispute an unpaid loan.
A signed confession of judgment can save a lender time and money.
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, often because the borrower didn’t pay back the loan. For small amounts, a judge can settle the lawsuit quickly in small claims court.
But 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.
What to do if you’re asked to sign a confession of judgment
You aren’t required to sign a confession of judgment for a creditor or lender. If you don’t, the lender may reject your application, however.
If you’re asked to sign a confession of judgment, here’s what to do:
- Negotiate. If the lender or landlord won’t agree to remove the confession of judgment clause from the contract entirely, they may agree to provide an additional notice to give you an opportunity to pay the debt or enter into a payment plan before confessing judgment. You may ask a lawyer to help draft or review this portion of the agreement.
- Consider other lenders. Not all lenders will include a confession of judgment in the contract, so shop around for other loan options. Even if you have a poor business credit score or insufficient credit history, you may qualify for a secured business loan or a loan with a personal guarantee.
- Read the fine print. Whether or not the loan agreement contains a confession of judgment, it’s important to understand the terms of the contract and the lender’s collection process in the event of default. For example, the promissory note may require you to pay the lender’s legal fees for collecting the debt.
- Consult a lawyer. If any part of the loan contract is unclear or seems predatory, you may want to ask an attorney to look over the document before you sign.
- Plan ahead. It’s important to have a backup plan in case your business doesn’t meet your revenue expectations. Make sure you have a plan for loan repayment even in tough economic times, especially if the contract contains a confession of judgment and/or a personal guarantee.
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:
- Hire a lawyer. A lawyer can help you understand the contract and which options are available to you.
- 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.
Frequently asked questions
Yes, you can refuse to sign a confession of judgment. It’s a contractual clause, not a legal requirement.
The lender may reject your application if you refuse, but you can negotiate to have the clause removed or shop around. Bank loans, SBA loans and commercial mortgages don’t typically include confessions of judgment in their terms.
Yes, you can challenge a confession of judgment by filing a motion to vacate with the court that entered it. Consult an attorney quickly if a confession of judgment is filed against you, as the process can move fast.
After a confession of judgment is filed, the court can enter a legally enforceable judgment against the borrower without a trial. The lender can then freeze bank accounts, place liens on property or seize assets to collect the debt.
A confession of judgment does not directly affect your personal credit score. Since 2017, civil judgments no longer appear on personal credit reports. However, they may show up on business credit reports and remain part of public record, which lenders can find during underwriting.
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