Understanding Confession of Judgment

By Robert Jacovetti

What is a Confession of Judgment?

A confession of judgment (COJ) is a legal instrument often included in business loan agreements during closing. It grants the lender the authority to bypass traditional legal proceedings and secure a court-ordered judgment for debt collection in the event of a loan default. Notably, this can occur without prior notice to the borrower, preventing them from mounting a defense or seeking a resolution, as they have essentially already admitted liability.

When a borrower signs a confession of judgment, it functions as an immediate acknowledgment of guilt in response to the lender’s legal claim. Once officially submitted in court and approved by a judge, this judgment empowers the lender to pursue collection actions, potentially involving pledged collateral or other assets. Additionally, the lender might have the option to place a lien on your business’s receivables.

Benefits For Creditors

Creditors may like confessions of judgment because it simplifies the debt collection process, bypassing the need for a traditional lawsuit, and saving time and resources. However, due to past misuse of this document by predatory entities, most reputable lenders refrain from employing confessions of judgment.

If a lender requests your signature on a COJ, you might want to reconsider obtaining a loan from that company.

Reasons to Avoid a Confession of Judgment

By signing a Confession of Judgment, you are admitting guilt for breaching contract terms, and you forfeit your ability to mount a legal defense or negotiate with the lender. If the lender doesn’t have your best interests at heart, they can activate this clause and seize your assets for payment delays, even if it was caused by technical glitches, bank closures, or accounting errors.

Signing a COJ may result in the loss of business assets to settle the outstanding debt. However, when small business owners sign personally or provide personal guarantees, the lender can also seize personal assets. They may freeze and withdraw funds from the borrower’s personal bank account without prior notice. Furthermore, these judgments become part of public records, potentially hindering your business’s ability to secure future financing.

Think Twice Before Signing a Confession of Judgement

Confessions of judgment are not required, so take care to not sign one. Another way to avoid a COJ is to consult a seasoned attorney who has experience with helping business owners with debt.

Jacovetti Law, P.C. is here to help — our qualified business debt lawyers can answer your questions and asses your situation and explore what your next best course of action should be. For experienced guidance, contact us online or call (516) 217-4488.