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What is a confession of judgment, and how can it affect a loan?

On Behalf of | Mar 19, 2024 | Uncategorized

Business loans are complex financial instruments. Someone who is starting a new company, riding out a rough period or expanding a successful business may require outside financial assistance. A new loan can make a major difference for a business.

Of course, loans come with an obligation to repay the lender, and there are often penalties imposed if someone falls behind on business loan payments. Occasionally, creditors even end up taking business borrowers to court due to a payment default. One of the tactics that lenders use to minimize collections-related challenges when a business borrower defaults involves having them sign a confession of judgment when taking out a new loan.

What is a confession of judgment?

A confession of judgment (COJ) is a document that acknowledges a default or contract breach. Business borrowers may sign a COJ along with other paperwork when taking out a new loan. The lender can then use that document to secure a judgment if there is a delay or disruption in the repayment plan for the loan later. Unlike legal filings, a COJ does not require advanced notice to the borrower. Lenders can potentially take legal action within days of missed payments in some cases. Lenders can demand capital or even force the liquidation of company assets with a COJ in some cases.

How a COJ can affect a business loan

The most obvious impact that a COJ has on a business loan is that it streamlines collection activity for lenders. These documents tend to favor the lender at the expense of the borrower. Thankfully, lenders cannot compel people to sign COJs to secure business loans, although they may deny financing to those who do not willingly sign COJ paperwork. Business owners, especially new entrepreneurs, are often unfamiliar with their rights and with the unique elements of business loans and financing options.

Those who partner with attorneys when negotiating financing terms may be able to avoid potential pitfalls, including COJ requirements. Occasionally, those who have already signed documents may need assistance to counter the negative impact that a COJ might have on their organization. Properly responding to a confession of judgment or default judgments against a business could help a business owner or executive better control the company’s finances. Executives and entrepreneurs who understand the rules for business financing and who seek out proper support may have an easier time proactively and reactively addressing issues with a loan.