Understanding the Confession of Judgment (COJ)

A confession of judgment (COJ) is a legal agreement that says 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 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 court says you owe. Although judgments do not appear on your personal credit report, they are public record. If a lender decides to perform a public records search in addition to looking at your business credit report before approving you for small business financing, finding a record of judgment could make a negative impression on your application.

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.

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. 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 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.

Federal and state regulations on COJs

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

Which states allow COJs?

Confessions of judgment are regulated at the state level. But 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 COJs, but Florida courts will honor a valid COJ issued in another state. If you’re unsure whether a COJ is legal or enforceable, consult a lawyer for advice.

Most states prohibit confessions of judgment in business loan contracts, and the courts may consider a contract void if it includes a COJ. In a few states, it’s even illegal to ask someone to sign a contract that includes a COJ. But several states permit COJs in commercial contracts, including:

• Illinois
• Maryland
• Michigan
• Minnesota
• New Jersey
• Ohio
• Pennsylvania
• Texas
• Virginia

In some states, a COJ is only enforceable if certain requirements are met — for example, Ohio business contracts must include a clearly visible disclosure, and a COJ in a California business contract is only enforceable if the debtor gets legal advice from an attorney before signing.

Who uses COJs?

Lenders may include a confession of judgment in the loan agreement for certain types of financing, including:

• Equipment financing: Some lenders may include a COJ 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 COJ in order to quickly recoup the equipment.

• Merchant cash advances: 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 when there has been a breach of contract by the borrower.

• Commercial leases: Some landlords may require you to sign a COJ when renting a commercial space. 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.

• Family loans: COJs are also commonly used when friends or family loan money to each other. They prevent loved ones from going to court to dispute an unpaid loan.

Bank loans, SBA loans and commercial mortgages don’t typically include a confession of judgment, but it’s always a good idea to read all loan contracts carefully. Private business lenders rarely include a COJ in the loan contract, but they may require a personal guarantee.

What to do if you’re asked to 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. If you’re asked to sign a COJ:

1. Negotiate. If the lender or landlord won’t agree to remove the COJ 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.
2. 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.
3. 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, for which you should be aware of the potential costs.
4. 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.
5. Plan ahead. It’s important to have a backup plan in case your business doesn’t meet your revenue expectations. Nearly half of all businesses fail in the first five years, and even the most profitable businesses can suffer during a recession. Make sure you have a plan for loan repayment in those circumstances, such as the sale of an asset, 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.