Business lenders have many methods of ensuring they are repaid for money they loan. This can include liens against business assets, and filing suit against you when you miss payments. One of the toughest, though, is requiring a confession of judgment as a condition to receiving business funding. This can hamper your ability to borrow more in the future and limit your legal rights in a later dispute. While a recent New York law has outlawed their use in many cases, you should be aware of the potential for trouble in any business loan that requires it.
What Is a Confession of Judgment?
A confession of judgment, often referred to as a "COJ", is a signed affidavit that admits to owing the unpaid balance on a loan you take out. It typically requires your notarized signature in order to be valid. Once it is in place, you have admitted to owing your balance, giving the lender a document to file in court if you fail to pay and immediately obtain a judgment against you without having to first serve you with a summons and complaint. It saves the lender considerable time and money in the collection process, but does not grant the lender any rights it would not otherwise have. Before obtaining a judgment, the lender still has to present the court with its own sworn affidavit stating that you are in default. In other words, as long as you pay your loan in a timely manner, the confession of judgment affidavit will sit in the lender's file cabinet and never see the light of day.
Perils of Signing Confessions of Judgment
Signing a confession of judgment can often times make the difference between obtaining funds from that lender or not. In almost all cases, if a lender requires a COJ and you refuse to sign, the lender will refuse to fund the loan. Even so, before you agree to sign, you should consider that until your loan is paid in full the lender has the right to file the document with a court in the event of a default and immediately obtain a judgment without giving you prior notice. It takes away your ability to respond and contest the amount or validity of what you owe. In most cases, you won't even know a judgment has been entered against you until the lender takes steps to freeze and seize your assets. If the lender has moved in bad faith against you, or violated its own agreement in some way, you can try and raise those defenses later, but it becomes much more difficult to succeed. Similarly, if you want to contest the amount you owe, that can become more difficult in a post-judgment proceeding.
Even aside from your right to challenge what you owe, a confession of judgment can hinder your ability to borrow more. Once a judgment has been entered against you, it becomes a matter of public record and serves as a notice to other potential lenders that you may be a bad risk and that someone else can move quickly against your assets. With these limitations, your ability to respond to a business emergency is greatly weakened.
New York's Recent Ban on Confessions of Judgment
In June of 2019, the New York State legislature passed a law that effectively banned the practice of lenders requiring or enforcing confessions of judgment against small businesses outside the state. This had a monumental effect on the merchant lending industry because, due to generally favorable lending laws in the state, most of the lenders for small businesses incorporate in New York. Literally thousands of small business loans have been impacted by this new law.
Still, the legislation leaves three loose ends for small business owners. One is for businesses within the state of New York; the new law protects only out-of-state businesses taking loans with New York lenders. If you're a New York business you can still be required to sign a confession of judgment affidavit in order to get funded. The second is for businesses taking loans from non-New York lenders. For those businesses, the laws of the state in which the lender is organized will determine whether confessions of judgment are valid. Finally, for businesses covered by the law that had confessions of judgment recorded before the law passed, the courts will need to determine whether the confessions of judgment remain valid and enforceable.
Avoiding Problems with Confessions of Judgment
If your business has or may have a confession of judgment in place, the New York legislation does afford some opportunity. One option would, of course, be to pay off debts that may be covered by a COJ. It would open up other borrowing opportunities and remove some of the risk that a confession of judgment puts on your business. If that's not feasible, though, refinancing or pursuing a consolidation loan will give you an easy opportunity to get new financing that does not require a confession of judgment.
Business lending laws and regulations change frequently. If you need to borrow for your business operations, new enactments and statutory amendments can create opportunities for you to not only obtain funds, but to improve your financial and legal position in the process. Now is a great time to take advantage of the changes the New York law has created in the lending industry. Contact us today and we'll get you out from under any confession of judgment you have in place.