What is a Confession of Judgment & How Does It Work?

You may have heard horror stories about confessions of judgment, but do you know what it actually means? That’s what we’re going to find out together. 

The experts at Seek Capital are here to give you the facts about a confession of judgment so that you can proceed with caution if one is ever presented to you.

What is a Confession of Judgment?

A confession of judgment is a legal agreement that you may be presented with when you borrow from a lender. This document essentially says that you agree to waive any rights to due process if you default on your loan.

In other words, if you don’t make your scheduled payment on time, the lender can sue you, and you will have no legal recourse in the matter. Shockingly, this can even happen if you do make your payments on time!

So, if you are accused of missing a payment, and you signed a confession of judgment, you won’t get a trial and will automatically be deemed at fault, guilty, and potentially out even more money than what your initial loan was worth.

A similar document, called a “cognovit note,” states that the borrower gives their attorney the right to enter a confession in court against a judgment. It’s no surprise (or is it?) that most states prohibit cognovit notes. 

It is important that you don’t get confessions of judgment and consent judgments mixed up. The latter is a decree that details the terms of a settlement – one that has been agreed upon by both parties rather than a lawsuit.

A confession of judgment may even come with a personal guarantee that says you will forfeit personal funds in the event that the loan isn’t paid back. It is imperative that you are clear on the implications of signing a confession of judgment. 

In doing so, you are by all accounts admitting to breaking the agreement of the contract before it even happens. What’s more, whatever penalties are outlined in the agreement can be invoked without you ever getting a fair shake or chance to tell your side of the story (or in some cases, the truth).

Imagine signing a legal document that says you can be convicted of murder at any time, regardless of whether you committed the crime. 

Confession of Judgment and State Law

That’s right, confession of judgment language is regulated under state law – if it is allowed in the state in which you live. In fact, most states don’t allow confession of judgment language. And in some of the states that do, confession of judgment language is limited to certain areas.

Take Pennsylvania, for example. Confession of judgment language is allowed if the transaction is a commercial one. And in other states, the borrower is allowed a period of time to file a motion in their favor so that they can work out a payment arrangement.

Confessions of Judgment: How They Work

As strange as confessions of judgment sound, the concept is pretty straightforward. First, a company receives a business loan from a licensed lender. The company then signs legal documents that have the confession of judgment language presented to them during the loan approval process.

After the paperwork is signed, the borrower is late a day in making their payment. With the confession of judgment signed and in hand, the lender proceeds to go to court. From there, the lender will need to get someone from the court, like a clerk, to agree with them that the borrower of the loan is in default. 

Being in default simply means that the borrower is behind on their agreed payments. This can be as little as a day or much longer. Once the court agrees with the lender that the borrower is in default on their payments, the court will act upon the confession of judgment.

When this happens, the lender will receive a judgment order from the court. The lender then takes this order to the borrower’s bank, forcing them to freeze the borrower’s assets and hand them over to the lender.

What is even more preposterous is that there isn’t a legal aspect of this that says the lender has to let the borrower know that their money will be taken from them and given to the lender.

Confession of Judgment: The Language

To give you a better understanding of the language that is included in a confession of judgment, let’s examine a real-world example of a confession of judgment document. The following is the language found on a Virginia confession of judgment.

NOTICE TO DEBTOR:

  • 8.01-433. Setting aside judgments confessed under § 8.01-432. – Any judgment confessed under the provisions of §8.01-432 may be set aside or reduced upon motion of the judgment debtor made within twenty-one days following notice to him that such judgment has been entered against him, and after twenty-one days’ notice to the judgment creditor or creditors for whom the judgment was confessed, on any ground which would have been an adequate defense or setoff in an action at law instituted upon the judgment creditor’s note, bond or other evidence of debt upon which such judgment was confessed. Whenever any such judgment is set aside or modified the case shall be placed on the trial docket of the court, and the proceedings thereon shall thereafter be the same as if an action at law had been instituted upon the bond, note or other evidence of debt upon which judgment was confessed. After such case is so docketed the court shall make such order as to the pleadings, future proceedings and costs as to the court may seem just.

Furthermore, there are fields and verbiage that gives the lender the right to write in the amount they believe they are owed, as you can see below.

I/we, the above-named debtor(s), acknowledge myself/ourselves, to be justly indebted to, and do confess judgment in favor of, the above-named creditor(s) in the sum of $ ………………… (…………………………………………………………………………………………………….. dollars) together with interest thereon at the rate of …………………………% from ……………….. until paid and cost of this proceeding (including the attorney’s fees and collection fees provided for in the instrument on which the proceeding is based) hereby waiving my/our homestead exemptions as to the same, provided the instrument on which the proceeding is based carries such homestead waiver.

Given under my/our hand(s) this day.

Can a Person or Business Get Their Money Back?

Since it is a legal document with your signature on it, it is virtually impossible to fight it and recover your losses. As such, you need to do your due diligence and research your lender thoroughly before signing any documents.

Suppose the lender is adamant about you signing a confession of judgment and isn’t willing to offer an alternative agreement to your loan. In that case, it is usually best to walk away and look for another lender. 

You may also want to get an attorney to examine your loan documents before you sign. If you are unsure about any language present in the document, get a law expert to look at it first.

With the state of the current economy – well, the world – it is understandable that small business owners might be feeling desperate at the moment. Don’t let this cloud your judgment. Signing a confession of judgment could potentially put you in even more financial trouble than you are now.

Look for other ways to secure a business loan that don’t require you to sign a confession of judgment. There are several options out there that you might qualify for. It doesn’t hurt to check around and compare rates.

If you do find a lender that you like, check out their reviews and ask around to get a feel for their business practices. 

Summary

We’re not saying that all confessions of judgment will lead to you getting falsely accused of missing your payments. But it’s happened enough times that we strongly advise against it. Honest, hard-working business owners have lost everything because a shady lender wanted to get as much as they could.

Some business owners have been forced to file bankruptcy and hand over their life savings, all because they signed a confession of judgment. 

Bottom line: look for reputable lenders and try your best to avoid signing a confession of judgment.

If you are worried about your ability to qualify for a small business loan, we encourage you to read our guide on 5 Simple Things to Make Getting Small Business Loans Easier to give some guidance on improving your chances of getting approved. 

Our business experts have compiled a treasure-trove of tips and information that are designed to help small business owners. From growing your business to providing great customer service even during the pandemic, we cover all kinds of topics that may be a benefit to you!

 

Sources

https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=109720

https://www.tampabay.com/business/tampa-couple-lost-big-by-signing-a-confession-of-judgment-they-arent-alone-20181206/

https://definitions.uslegal.com/c/cognovit-note/

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