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.
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.
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.
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.
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:
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.
Lenders may include a confession of judgment in the loan agreement for certain types of financing, including:
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.
When a borrower breaches a contract, lenders typically have to take the borrower to court to prove they did not adhere to the terms set in the business loan agreement, usually meaning the borrower didn’t pay back the loan. For small amounts, a judge can settle the lawsuit quickly in small claims court.
But 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.
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:
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: