If you’ve ever taken out a business loan or a Merchant Cash Advance (MCA), there’s a good chance you signed a Confession of Judgment (COJ). Even if you’re familiar with the term, you might not fully understand its implications. Many borrowers don’t even realize they’ve agreed to a COJ, as lenders are often not required to highlight it.
Lenders include COJ clauses in contracts as a form of personal guarantee—especially those supplying capital without collateral requirements—and when it comes to signing one, what you don’t know can hurt you.
What Is a Confession of Judgment?
A Confession of Judgment, sometimes called a cognovit note, is a legally binding document that waives a borrower’s right to due process if they fail to meet their repayment obligations. If a lender initiates legal action, the borrower who signed a COJ has essentially surrendered their right to contest the claim. In many cases, the borrower isn’t even notified before a judgment is entered against them.
A typical COJ includes language such as: “The undersigned irrevocably authorizes any attorney to appear in any court of competent jurisdiction and confess a judgment without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgment.”
Sound alarming? It is.
The use of COJs dates back to the Middle Ages as a way to enforce debt repayment without the need for lengthy trials. However, their potential for abuse has led to widespread criticism. By the mid-20th century, most states in the U.S. had abolished COJs in consumer lending due to concerns over borrowers losing assets without due process. This led to a federal ban on COJs for consumer loans in 1985.
Despite these protections for consumers, certain states, including New York and Pennsylvania, still permit COJs for commercial loans. In some cases, even if a borrower resides in a state that prohibits COJs, they can be held accountable if they sign an agreement governed by the laws of a state that does allow them.
A 2019 law rendered confessions of judgment executed by parties outside of New York no longer enforceable in New York, however. These restrictions represent an awareness of the potential for abuse, and a small measure of progress in terms of consumer protections. But the fact remains that since COJs apply to businesses rather than individuals, most of these protective measures don’t apply.
Why Sign a COJ?
Confession of Judgment clauses are sometimes embedded in loan agreements in a way that makes them easy to overlook. Even when the clause is clearly stated, borrowers often sign anyway because these types of cash advances don’t require collateral and are available to businesses that can’t obtain a traditional loan.
After 2008, traditional business loans became harder to secure. When struggling business owners are desperate for funding, they’re often willing to accept high-cost advances without fully recognizing the dangers of signing a COJ. They intend to repay the loan, but if unforeseen circumstances prevent them from doing so, they’re often unprepared for what happens next.
What Happens If a COJ Is Filed Against You?
If you signed a COJ, your lender can file a complaint in court, often electronically, without notifying you in advance. They can obtain a judgment against you without litigation, enabling them to collect their money quickly.
You may not realize what has happened until it’s too late. A COJ judgment can result in liens against your property and receivables, and lenders may seize your assets immediately. Even if you are not in serious default—or if you missed just one payment and resumed paying soon after—you have no defense. There is no judicial review, and the lender does not have to provide proof of wrongdoing. Your bank accounts—both business and personal—could be frozen without warning.
Before COJs became widespread, lenders faced a lengthy process to obtain and enforce judgments, often taking months or even years. However, the first COJ was filed in a New York court in 2012, and since then, collections have become significantly easier for lenders. Alternative lenders have been able to recover not just the owed amount but also additional fees, making COJs a lucrative tool. Since 2012, over 25,000 judgments have been issued to MCA companies in New York alone.
How Can You Fight Back?
Once a COJ judgment is entered, overturning it is nearly impossible. Because the process is legally binding and the lender has proof that you signed, there is little room for legal recourse. A borrower may need to hire an attorney, but with their accounts frozen, affording legal counsel becomes a challenge. Moreover, legal proceedings can take months—far too long to save a struggling business from financial ruin.
The best defense is awareness. If you need funding and are considering a loan agreement that includes a COJ, consult a financial professional to explore alternative options. If you have already signed a COJ and are at risk of defaulting, contact Rise Alliance before missing a payment. Our debt workout and business restructuring solutions can help protect you from bankruptcy and set you on the path to long-term success.