Confession of judgment: what it is and what changed
A clause that lets a creditor obtain a judgment against you without suing you first. Here is what it does, what federal and state law changed, and what to do if you have already signed one.
What the clause actually does
A confession of judgment reverses the normal order of events. Ordinarily a creditor who believes you have defaulted must sue, serve you, and prove the claim, and you get to respond. With a signed confession of judgment, you have already agreed that judgment may be entered against you on the creditor's word that you defaulted. There is no hearing first because you waived it when you signed.
What follows a judgment is the part that surprises people: it can be used to freeze bank accounts and levy assets. An owner can discover the problem when payroll fails to clear.
Other names for the same thing
It may appear as a cognovit clause, a confession of judgment, a warrant of attorney, or a power of attorney to confess judgment. It is sometimes a separate document signed alongside the agreement rather than a clause inside it, which is why it can be missed.
What changed, and what did not
Two shifts matter, and conflating them is the most common error on this topic.
Consumer credit: prohibited
The Federal Trade Commission's Credit Practices Rule bars confessions of judgment in consumer credit contracts, and the FTC acted on this in 2019. If the borrower is a consumer, the instrument is not available.
Commercial borrowers: restricted in places, not abolished
A small-business advance or loan is commercial credit, and the consumer prohibition does not reach it. Instead the position varies by state. Some states have long refused to enforce them. New York, historically the venue of choice for filing them, narrowed its rules in 2019 by restricting the filing of confessions against borrowers based outside the state. Several states have since enacted commercial financing disclosure statutes that touch adjacent ground.
Reading an agreement before you sign it
Four clauses are worth finding every time, and they are usually near the end:
- Confession of judgment / cognovit. Ask explicitly. Ask whether there is a separate document as well as a clause.
- Governing law and venue. These decide whose rules apply and where you would have to appear.
- Personal guarantee. Separate from a confession of judgment and frequently confused with it. A guarantee makes you personally liable; a confession of judgment removes the hearing. An agreement can contain both.
- Default definition. Worth reading closely, because some agreements define default more broadly than missing a payment.
Where this sits in the cost of an advance
A confession of judgment is a risk term, not a price term, and it is easy to focus on it and lose track of what the money costs. Both matter. If you are comparing offers, our cost calculator converts a factor rate into an effective annual rate, which is the only way to compare an advance against a loan on equal terms: 50,000 dollars at a 1.30 factor costs 15,000 dollars either way, but on daily debits over four months that is roughly 410% effective annual and over eighteen months roughly 44%.
- Federal Trade Commission — Credit Practices Rule, and its 2019 action on confessions of judgment in consumer credit
- Your state's attorney general or financial regulator, for the current commercial position
- The governing-law and venue clauses of your own agreement, which determine which state's rules apply
- A licensed attorney in the relevant state. This page is general information and not legal advice.
Frequently asked questions
What is a confession of judgment?
It is a clause, or a separate signed document, in which a borrower agrees in advance that a court may enter judgment against them if the creditor says they have defaulted. Because the agreement is signed up front, the creditor can obtain the judgment without first filing a lawsuit and without the borrower appearing to contest it. The practical effect is that bank accounts can be frozen and assets levied before the borrower has had a hearing.
Are confessions of judgment still legal?
It depends on the jurisdiction and on who signed. In 2019 the Federal Trade Commission barred their use in consumer credit contracts nationwide. For COMMERCIAL borrowers the picture is different and varies by state: some states have never permitted them, some restrict them heavily, and New York narrowed its rules significantly in 2019 by limiting where an out-of-state borrower's confession could be filed. This is state-specific and it changes, so confirm the current position for your state with a lawyer.
Why do merchant cash advance agreements contain them?
Speed of collection. An advance is repaid from future sales, so a funder's main risk is that payments stop. A confession of judgment turns a collection dispute that would normally take months of litigation into a filing. That is precisely why it is one of the most contested features of the product.
I have signed one. What should I do?
Get a lawyer, ideally one who has handled commercial financing disputes in the state where the agreement says disputes will be heard. Do this before you miss a payment, not after, because the value of legal advice drops sharply once a judgment has been entered. We are not a law firm and cannot advise you on a signed agreement.
Can a judgment entered this way be undone?
Sometimes, through a motion to vacate, and the grounds and the deadlines are narrow and state-specific. Whether it is possible in your case is a question for a lawyer with the agreement in front of them. Anyone who tells you the outcome without reading it is guessing.
How do I avoid signing one?
Read the agreement in full before signing, and ask directly whether it contains a confession of judgment, a cognovit clause, or a power of attorney to confess judgment. If the funder will not remove it and you are not comfortable with it, that is a reason to compare other offers. Also check the governing-law and venue clauses, which determine where any dispute would be heard.
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