March 15, 2021

Small Business Loans and Confession of Judgment: What to Know

When you need a loan for your real estate company or any other small business, you could be at risk of losing your assets if you sign a Confession of Judgment. Unless you are familiar with the language that indicates the inclusion of this type of clause, you may unknowingly sign a document that allows your lender to seize your funds without warning if they convince a court that you breached your terms. This article will help you learn more about the risks of Confessions of Judgment and why you should hire an attorney when considering a business loan or facing a judgment.


What is a Confession of Judgment?

A Confession of Judgment is a legal document included in a business loan or commercial agreement that waives the borrower’s right to due process in court if the terms of their loan contract are broken. The borrower cannot dispute any legal claims by the lender that they did not comply with these terms. The lender can then present the court’s judgment to the borrower’s bank and demand immediate payment, leaving the business penniless.

While the Federal Trade Commission outlawed the inclusion of Confessions of Judgment in consumer loans, state law regulates their use in business loans. Confessions of Judgment are permitted in Maryland, Michigan, Illinois, New Jersey, Minnesota, Ohio, Pennsylvania, Virginia, and Texas. Pennsylvania allows these judgment clauses specifically in UCC transactions.

SBA loans or loans from banks do not typically include Confessions of Judgment because they use methods like required collateral to secure loan payments. They are most likely to appear in a promissory note resulting from business financing, equipment loans, or merchant cash advances. Loans between family or friends often contain these judgments as well.

Confessions of Judgment allow equipment financing companies to immediately retrieve borrowed equipment, while commercial landlords benefit from the ability to instantly evict a business that misses payments. These lenders use Confessions of Judgment because they save time and money if a borrower defaults on their payments. The process to recover the original amount may require multiple hearings and expensive legal fees that can potentially exceed the original borrowed amount.


Filing a Confession of Judgment

After you sign a Confession of Judgment, it will not take effect as long as you strictly adhere to the contract. If you miss a payment or violate any other terms, the lender can go to the court clerk’s office to enforce your breach of contract and enter a judgment in court.

The signed agreement means that the borrower automatically confesses and accepts the legal dispute’s judgment, allowing the lender to file the judgment without trial. They can then contact a bank to withdraw the debt’s total amount and additional fees immediately without notifying the borrower.


Why You Should Avoid Confessions of Judgment

When you sign a Confession of Judgment, you automatically plead guilty to breaking the contract terms. This waives your right to prepare a legal defense against the judgment in courts or the ability to compromise with the lender. The lender keeps the Confession of Judgment as a clause or form in the loan paperwork that they can file as soon as you violate the loan agreement.

If your lender does not have your best interests in mind, they can trigger this clause and seize your assets with almost any delay in payment, including computer malfunctions, bank closures, or accounting errors. Even missing a payment by a single day will allow the lender to file a Confession of Judgment against a borrower.

Because this judgment requires almost no proof, there are cases in which lenders file Confessions of Judgment even without missed payments or other contract breaches. The process is legal and leaves the borrower with limited or no funds, making it challenging to hire the legal help needed to prove that a filed confession was incorrect.

Signing a Confession of Judgment as a business entity means that you will only lose business assets to pay off the remaining debt. However, if small business owners sign a confession in their name or with personal guarantees, the lender can seize personal assets as well. The lender can then freeze and take funds from the borrower’s bank account without notifying them. These judgments enter public records, which can make it difficult for your business to request future financing.

Pennsylvania’s Confession of Judgment system has a 30-day waiting period for the debtor to file motions and work out repayment. Despite this, the state does not require a lender to notify the borrower, so you may only find out that a judgment was filed against you after seizing your funds.

Previously, there was also a loophole in which companies could obtain a judgment in New York courts for agreements signed in other states as long as their headquarters was located in New York City. The state of New York now prohibits issuing Confessions of Judgment to businesses in other states. Other states, including Virginia, require lenders to label these clauses clearly.

Some states, such as Massachusetts and Florida, have banned Confessions of Judgment altogether. However, businesses in New York, Pennsylvania, and other states that allow Confessions of Judgment are still vulnerable to predatory practices.


Before You Sign a Confession of Judgment

Confessions of Judgment are not required from creditors or lenders, so you should avoid signing one whenever possible. Be sure to take these steps to avoid inadvertently waiving your right to due process when securing a loan for your small business.

Do Your Research

Before agreeing to sign a business loan contract, carefully read it to find the consequences of missing a payment. The lender might add a Confession of Judgment to an existing promissory note or other related documents. Make sure that your agreement is free from mentions of Confessions of Judgment, promissory notes, or consent decrees, as well as terms such as “confess judgment against the debtors” and “immediate enforcement of a judgment.”

Learning more about your lender can also help you avoid predatory practices. Use the reviews of other businesses, Better Business Bureau ratings, and the amount of time they have been in business as indicators of a lender’s trustworthiness. It is also worth researching Confession of Judgment state regulations in your state and the state in which the lender’s headquarters is located.

Trustworthy lenders usually entitle you to due process if you make a mistake with your payments or a way to make up for violating the terms of your agreement. Ask the lender about their policies for missed or late payments before signing a contract. You should be wary of offers for a larger loan than you need and high-pressure sales tactics.

If the lender insists on including a Confession of Judgment, even if you are willing to give other guarantees, you might want to seek financing options with less restrictive terms. Even if traditional loan options are limited by your business’s credit rating or age, you can usually find alternative lenders that do not include a Confession of Judgment.

Seek Consultation

The easiest method to avoid a Confession of Judgment is to consult an attorney who has experience with small business loans. Many small businesses opt to skip this step to avoid extra expenses, but having a lawyer review your loan documents before you sign them is much cheaper than trying to get your assets back after a judgment. They can also help you negotiate better terms to protect you from other unfavorable details that could put your business assets at risk.


After You Sign a Confession of Judgment

Acting against a Confession of Judgment after you have signed it is more difficult but not impossible, as long as you can hire an attorney. With a loan from a reputable lender, you may not have to worry about them filing a Confession of Judgment against you unless you miss your payments and are unable to work out a repayment plan.

If a creditor files a Confession of Judgment against you, you can still lessen its impact by paying the debt in full or hiring a lawyer to negotiate a settlement. Some state laws will remove the judgment once you pay off your debt.

An attorney can also help you vacate the judgment in court. If the funder was negligent in describing the rights you signed away with a Confession of Judgment or failed to follow proper procedures, you can file a motion to appeal the original ruling. You could also remove the judgment from your credit file if you can prove that you paid your debt and that the lender filed a judgment against you due to clerical errors or other inaccuracies.


A Bankruptcy Attorney Can Help You

Whether you have already signed a Confession of Judgment or are considering a new small business loan, speak with us at Siddons Law Firm. Contact us today for a consultation with an experienced Pennsylvania lawyer who has represented a wide range of clients in collections and bankruptcy-related litigation.

Call today 610-255-7500