Understanding the COJ (Confession of Judgment)
When searching for financing, it’s easy to rush through the process to get funding as fast as possible. However, it’s imperative to understand the full terms of your agreement before signing on the dotted line. A confession of judgment (COJ), for example, is one of the required documents that could slip through the cracks when signing your loan paperwork. We’ll discuss what exactly a COJ is and how you can avoid problems down the road.
What is a Confession of Judgment?
A 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, 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 and it appears on your credit report. If anyone, lenders included, sues you for money and you lose, a judgment is filed against you. COJs are permitted in just a handful of states, including Texas, Maryland, Virginia, Illinois, Ohio, Pennsylvania, New Jersey, Michigan and Minnesota.
COJs are commonly used when people loan money to each other, explained Art Steele, owner of Legal-EASE for Entrepreneurs, a Virginia-based law firm for small businesses. Traditional bank lenders, SBA lenders and private nonbank lenders generally don’t use COJs because they have other methods of securing loans, like requiring collateral. However, certain types of financing, such as equipment loans and merchant cash advances, are more likely to come with a COJ.
Nonbank third-party lenders use COJs on equipment financing to allow them to quickly retrieve pieces of equipment if a borrower defaults, rather than waiting through court proceedings to collect their property, Elizabeth Milito, senior executive council for the National Federation of Independent Business’s (NFIB) Small Business Legal Center, told LendingTree. Third-party lenders also use COJs on merchant cash advances to avoid building up legal fees that could exceed the amount of the original advance, said Milito.
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.
“If you’re a minute late, the landlord can go to court and file a confession of judgment and seek to evict you,” Milito said.
How it works
A lender would require a borrower to sign a COJ at the beginning of the lending process along with all other required documents related to the loan terms, Steele informed LendingTree. If you violate the terms at any point, the COJ gives the lender the ability to go to their local courthouse and file a judgment against you without a trial.
“It’s a very powerful document,” Steele said.
If a business signs a COJ, then the lender could only go after business assets to pay the debt. However, if an individual 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, you stand to lose your business or your belongings, or both, if you fail to pay back the money borrowed.
Why do lenders use COJs?
For lenders, a COJ significantly reduces the resources required to chase down a borrower that has defaulted on their payments. “From a lender’s perspective, it’s great because it cuts a lot of time and money out of the process,” said Steele.
When a borrower breaches a contract, lenders typically have to take them to court to prove they did not adhere to the terms set in the loan agreement, usually meaning they didn’t pay back the loan, Steele said. 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.
A COJ also reduces the lender’s risk. A borrower is more likely to pay back a loan if they know the lender could come after their personal assets, and they would want to avoid the impending judgment if they default.
“When people know they have a confession of judgment hanging over them, they prioritize your loan even if they’re having hardships because they don’t want that judgment to go on their credit,” Steele said.
What to consider before signing a Confession of Judgment
Any time you sign legal documents, it’s best to have a lawyer review them to make sure you are fully informed. People often don’t understand COJs and are surprised to learn how much power the lender has once it’s signed.
“For something so extreme, it’s really common,” Steele said. “People really need to know what they’re getting into.”
Keep detailed records of payments
A COJ functions like any other contract, and you are bound to it once you sign. One way to arm yourself against the lender would be to keep detailed records of each payment you make and get confirmation of receipt. If the lender files a false judgment, you could use your records to defend yourself.
“You want to make sure that you, as the person who is the borrower, has really immaculate records of when you’re paying and how much you’re paying,” Steele said.
If you’re having trouble making payments, Steele said you could try to work something out with your lender. But if the lender chooses instead to file a judgment against you, you would be accountable for that debt until you pay it off or file for bankruptcy to wipe out all of your debts, Steele said.
Understand the risks
Signing a COJ is essentially an automatic admission of guilt if the lender claims you have defaulted on your payments. Unless you’ve kept detailed records of payments that dispute what the lender claims, there’s not much you can do to escape a judgment, Steele said.
A judgment against your business would affect your future efforts to secure financing, Milito said. Without the ability to borrow money, your business could sink.
“If you’re going forward to try to get a loan or line of credit, it’s going to show up when a bank runs a credit check,” she said. “It’s a blemish, a black mark.”
Defaulting on a COJ
A judgment will appear on your credit report for seven years after the initial filing date. When you pay off the debt, the judgment will be classified as “satisfied,” but credit reporting companies may keep the original judgment information on file.
The only thing you can do after a judgment has been filed against you is pay the money you owe, Steele said.
“It’s not like you’re going to jail,” she said. “It’s just like any other debt.”
Although the judgment will appear on your credit report for seven years, the negative impact on your credit will lessen over time once you’ve paid the debt. If you have other outstanding loans, maintaining timely payments on those would improve your credit score, Milito said.
The best way to avoid the consequences of a COJ would be to have an attorney look over the documents a lender asks you to sign. An attorney could negotiate more favorable terms to protect you, Milito said.
“It’s always worth making an ask to modify a contract or add a term or provision to make it more favorable,” she said. “Don’t assume there’s no room to negotiate.”