Confession of Judgment (COJ)
A confession of judgment is a pre-signed legal clause that allows a lender to obtain a court judgment against a borrower without prior notice, trial, or the borrower's ability to mount a defense.
Definition
A confession of judgment (COJ), sometimes called a cognovit note or cognovit clause, is a legal instrument embedded in a financing agreement where the borrower pre-authorizes the lender to enter a court judgment against them in the event of default. The borrower waives their right to notice of legal proceedings, the right to a hearing, and the right to present a defense before judgment is entered.
In practice, if the lender claims a default has occurred, they can file the confession of judgment in court and obtain an enforceable judgment almost immediately. This judgment can then be used to freeze bank accounts, garnish wages (for personal guarantors), or seize assets without the borrower ever appearing before a judge. COJs have historically been most prevalent in merchant cash advance (MCA) contracts and other alternative financing products where borrowers have limited negotiating power.
The enforceability of confessions of judgment varies significantly by state. Some states permit them in commercial contracts but prohibit them in consumer lending. Others have banned them outright or restricted their use, particularly when filed by out-of-state lenders against in-state borrowers.
Why It Matters
For business owners seeking capital, a confession of judgment clause represents one of the most significant legal risks in any financing agreement. Because the borrower has pre-waived their due process rights, the lender can obtain a judgment and begin asset seizure before the borrower even knows legal action has been taken. A single disputed payment or technical default can trigger account freezes that shut down business operations overnight, creating a cascading failure that turns a manageable dispute into a business-ending event.
The controversy surrounding COJs intensified after investigative reporting revealed widespread abuse in the MCA industry, where some funders used confessions of judgment aggressively, filing them in borrower-friendly jurisdictions (historically New York) regardless of where the borrower was located. This led to significant regulatory action. New York banned the use of confessions of judgment against out-of-state borrowers in 2019, and the Federal Trade Commission has taken enforcement actions against funders who abused COJ clauses.
Understanding whether a financing agreement contains a COJ clause is essential before signing. Borrowers who encounter one should treat it as a major red flag and carefully evaluate whether the financing terms justify the legal exposure, or whether better-structured alternatives exist through working capital loans or revenue-based financing products that do not require such provisions.
Common Mistakes
Signing without reading the full agreement COJ clauses are often buried deep in financing contracts, sometimes in dense legal language or in separate addendum documents. Borrowers focused on funding speed may sign without identifying the clause. Every page of a financing agreement should be reviewed, ideally with legal counsel, before execution.
Assuming a COJ cannot be enforced in their state Even in states that restrict confessions of judgment, enforcement can be complex. A lender may file in a permissive jurisdiction and then domesticate the judgment in the borrower's state. While recent reforms have narrowed this practice, borrowers should not assume geographic protection without confirming with an attorney familiar with their state's current laws.
Confusing a COJ with a standard personal guarantee A personal guarantee makes the borrower personally liable for the debt, but the lender must still go through normal legal proceedings to collect. A COJ eliminates those proceedings entirely. The two serve different purposes and carry vastly different levels of legal risk for the borrower.
Not negotiating removal of the COJ clause Some borrowers assume that COJ clauses are non-negotiable. While many MCA funders and alternative lenders include them as standard terms, borrowers with stronger credit profiles or those willing to offer other forms of security (such as a first-position lien or additional collateral) may be able to negotiate removal of the clause.
Failing to act immediately when a COJ is filed Once a confession of judgment is filed, time is critical. Bank accounts can be frozen within days. Borrowers who discover a COJ has been filed must immediately contact legal counsel to explore options such as vacating the judgment, challenging the underlying default claim, or negotiating a resolution before assets are seized.
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Is a confession of judgment legal?
Confessions of judgment are legal in some states for commercial (business-to-business) contracts but are prohibited or heavily restricted in others. They are generally banned in consumer lending nationwide under federal law. The legality depends on the state where the agreement is executed, the state where it is filed, and whether the borrower is an individual or a business entity. Several states, including New York, have enacted reforms specifically targeting out-of-state COJ filings commonly used in the MCA industry.
What types of financing agreements typically include a COJ?
Merchant cash advances are the most common financing product to include confession of judgment clauses. They also appear in some short-term business loans from alternative lenders, factoring agreements, and other non-bank financing products. Traditional bank loans, SBA loans, and conventional lines of credit almost never include COJ provisions, relying instead on standard default and collection procedures.
Can a confession of judgment be vacated or reversed?
In some cases, yes. A borrower can petition the court to vacate (cancel) a confession of judgment, particularly if they can demonstrate that the underlying default did not actually occur, that the COJ clause was obtained through fraud or misrepresentation, or that the filing violated state law (such as filing against an out-of-state borrower in a jurisdiction that prohibits it). Success depends heavily on the specific facts, the jurisdiction, and how quickly the borrower acts after learning of the judgment.
How can I tell if my financing agreement contains a COJ?
Search the agreement for terms such as "confession of judgment," "cognovit," "cognovit note," "warrant of attorney," or "judgment by confession." These clauses may appear in the main agreement body, in a separate addendum, or in a personally signed affidavit attached to the contract. If you are unsure, have a business attorney review the full document package before signing. Also review the term sheet and all associated rider documents.
What should I do if a lender insists on including a COJ?
First, understand that a lender insisting on a COJ may indicate higher risk in the deal or more aggressive collection practices. Consider whether alternative financing sources, such as working capital loans from traditional lenders, could meet your needs without this legal exposure. If you proceed, negotiate to limit the COJ's scope (for example, restricting it to specific default triggers rather than broad language), consult an attorney about enforceability in your state, and ensure you have a clear understanding of what constitutes default under the agreement. Review the full offer evaluation framework before committing.
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