It means the funder can turn a claimed default into a court judgment against the business, and usually against you as guarantor, without suing first. The confession is a sworn admission, signed with the advance, that the balance is owed on a default; the funder files it, a judgment is entered without a hearing, and bank accounts can be frozen. Some states now limit them; New York, since August 2019, no longer allows one to be entered against a borrower outside the state. This is not legal advice. For a refinance, every confession signed, filed or not, must be disclosed and released or satisfied at close.
- What it is
- A signed affidavit admitting liability, held by the funder to file on a default
- What it allows
- A court judgment without a lawsuit, then collection against bank accounts and assets
- Where it is limited
- Rules vary by state; New York stopped entering them against out-of-state borrowers in 2019
- If one has been entered
- Talk to a lawyer at once; a judgment stands until it is vacated or satisfied
- In a refinance
- Disclosed, then released or satisfied at close as a condition of funding
What you signed
A confession of judgment, sometimes called a cognovit or an affidavit of confession, is a short document signed at the same time as the advance agreement. In it the business, and often the owner personally as guarantor, states under oath that it owes the funder a sum, usually the uncollected purchased amount plus fees, and authorizes the funder to have a judgment entered for that sum if the business defaults. It is not filed when it is signed. The funder keeps it.
What makes it different from an ordinary contract claim is what it skips. Normally a creditor who says it is owed money has to sue, serve the business, and give it a chance to answer before a court decides. A confession of judgment is the business's advance consent to skip those steps. The funder decides that a default has happened, files the affidavit, and a court clerk enters a judgment on the papers. The business is not asked first.
Many owners do not remember signing one. It is often a page among the closing documents of an advance, sometimes signed electronically, and it sits in the funder's file until it is needed. If you are not sure, ask the funder for a complete copy of what you signed, and read every page.
How funders have used them
The sequence below is how confessions of judgment have commonly been used against businesses with advances. The speed is the point: a business can find its account frozen before it knows a judgment exists.
| Step | What happens | What the business sees |
|---|---|---|
| A default is claimed | The funder decides the business breached the agreement: a returned debit, a blocked ACH, a second advance, a changed bank account | Often nothing yet |
| The affidavit is filed | The funder files the signed confession with a court, with its own statement of the amount owed | Nothing; there is no lawsuit to be served |
| Judgment is entered | The clerk enters a judgment for the amount claimed, plus fees and costs the agreement allows | Nothing, until collection starts |
| Collection starts | The funder serves the business's bank with a notice restraining the account, and may pursue other assets and the guarantor | Payroll and payments bounce; the account is frozen |
The complaints that followed were not only about speed. Owners reported judgments entered for amounts they disputed, for defaults they said had not happened, and for fees they had not expected, with the burden then on them to go to court to undo it. Those complaints are what led to the limits described below.
The limits on enforcing them
Whether a confession of judgment can be used against your business depends on the law of the state where it would be entered and the state where the business and its assets are. The broad picture, which is general information and not legal advice:
- New York changed its rule in August 2019. New York courts were where many advance-related confessions of judgment had been entered. Its amended law allows a confession to be entered only in the county where the defendant lived when it signed, so it can no longer be used in New York courts against a borrower outside the state. It did not stop their use against New York businesses.
- Other states set their own rules. A number of states prohibit confessions of judgment or restrict them sharply, and the details, including whether they apply to business contracts, differ from one state to the next.
- The federal consumer ban does not reach business contracts. Federal rules have long barred confessions of judgment in consumer credit contracts. An advance to a business is not consumer credit, so that rule generally does not apply.
- A judgment already entered stands until a court sets it aside. Even where a judgment was entered on a confession that should not have been used, it remains effective until vacated. Judgments entered in one state can generally be enforced in another through a registration process, subject to the challenges available there.
- Judgments can be challenged. Grounds that owners have raised include defects in the affidavit, disputes over whether a default occurred or what was owed, and arguments that the advance was really a loan. Outcomes depend on the facts and the court.
If a funder has entered a judgment or frozen an account, speak to a lawyer who handles these cases in the relevant state before doing anything else. Deadlines and remedies are specific to the court and the facts.
If a judgment has been entered
A frozen account is an emergency, and the instinct is to move money wherever it can still be reached. That instinct can make things worse. Moving funds to avoid a restraint, or opening accounts under another name, can create problems of its own with the court and with any lender who later reads the statements. The steps that tend to help are dull ones.
- Get the papers. The filed affidavit, the judgment, the restraining notice served on the bank, and the funder's statement of the amount owed. The court record shows what was filed and when.
- Get advice on the merits. Whether the judgment can be vacated, whether the amount is right, and what the funder's agreement actually allowed.
- Consider a negotiated resolution. Many are settled with a payment arrangement or a lump sum in exchange for a release and a filed satisfaction of the judgment. Any settlement should be in writing and should say what gets filed, by whom and when.
- Keep records of everything. A refinance lender will need to see how the judgment arose and how it ended.
Settlement companies that promise to make these problems disappear are a separate question; the trade-offs are on debt settlement versus refinance.
What a refinance has to resolve
A lender replacing advances with term debt is putting its own money in front of whatever claims the funders hold. A confession of judgment is one of those claims, and an unfiled one is invisible to the searches a lender orders, which is why lenders ask directly and expect a straight answer. The file should say, for each advance, whether a confession was signed and where it stands.
| Where it stands | What the lender will want before closing |
|---|---|
| Signed, never filed, advance current | The payoff letter to state that on payment the funder releases all claims, will not file the confession, and will return or destroy it |
| Filed, judgment entered, not yet paid | The judgment amount agreed in writing, paid at close from proceeds, and a satisfaction of judgment filed with the court |
| Bank account restrained | The restraint released as part of the settlement, so the new lender's loan does not land in a frozen account |
| Judgment already satisfied | A copy of the filed satisfaction, so the record matches what the owner says |
| Judgment disputed and being challenged | A clear account of the claim and the likely range of outcomes; many lenders will wait for it to be resolved |
In practice these items travel with the payoff. At closing, proceeds are wired to each funder against its payoff letter, and the letter should cover everything the lender needs released: the balance, the UCC filing, the confession and any judgment. Lien searches show the UCC filings and any entered judgments, and the lender checks both against the debt schedule. How the filings themselves are cleared is on removing a UCC filing after payoff.
Disclosure is what keeps a file alive. A lender that learns of a confession from the owner can structure around it. One that learns of it from a frozen account after closing will look at the representations the owner signed in its loan agreement, which commonly cover judgments and claims against the business, and an undisclosed one can be treated as a default on the new loan. The full approach to these refinances is on refinancing cash advances into term debt and MCA refinancing.
Common questions
- Is a confession of judgment enforceable if my business is not in New York?
- Not in New York's courts, since the August 2019 change, unless the signer lived in New York, in the county where it is filed, when it signed. Whether it can be entered elsewhere depends on that state's law. Ask a lawyer in your state; this is general information, not legal advice.
- Will a signed confession of judgment show up on a lien search?
- Not until it is filed. An unfiled confession sits in the funder's file, which is why a refinance lender asks about it directly and expects the payoff letter to deal with it.
- Does paying off the advance cancel the confession?
- It removes the debt the confession secures, but get the release in writing. The payoff letter should say the funder will not file it and will return or destroy it once paid.
- Can a judgment on a confession stop me from refinancing?
- It has to be resolved first, but it does not end the conversation. Many refinances pay an agreed judgment amount at close, with a satisfaction filed, alongside the other payoffs. A judgment still in dispute is harder, and many lenders will wait for the outcome.
- Can I refuse to sign one?
- You can ask. Some funders will write an advance without one, particularly where state law already limits them. Where a funder insists, that is part of the advance's price, and worth weighing before signing.