What is a confession of judgment, and should I ever sign one?

A confession of judgment is a document you sign, usually alongside a funding contract, agreeing in advance that the funder can enter a court judgment against you for a set amount if it says you've defaulted. There's no lawsuit and no hearing first. The funder files the confession and gets a judgment it can enforce against your business and, if you signed personally, against you.

Why it matters so much

Normally, a creditor that says you owe money has to sue, and you get to answer. A confession of judgment removes that step. The FTC has described these clauses in merchant cash advance contracts as allowing the provider "to go immediately to court and obtain an uncontested judgment in case of an alleged default."

Paired with a personal guarantee, that can mean a judgment against you personally before you've had a chance to dispute the default.

The New York change in 2019

Before 2019, New York's rule let confessions be filed against defendants who lived outside the state. On August 30, 2019, New York amended CPLR 3218. The confession must now state the county where the defendant resides, and it can be filed only with the clerk of the county where the defendant lived when it was signed, or lives when it is filed. For a business owner outside New York, there is no such county, so the confession can't be filed there.

That closed one route. It didn't ban confessions of judgment everywhere, and some states still allow them under their own rules.

What regulators have done

• In June 2020, the FTC sued RCG Advances (formerly Richmond Capital Group), alleging it used confessions of judgment "to seize consumer personal and business assets, in circumstances not expected by consumers and not permitted by the defendants' financing contracts."
• In January 2022, the FTC announced a settlement banning RAM Capital Funding and its owner from the industry and ordering them to vacate judgments against former customers and release liens.
• In February 2024, the New York Attorney General announced a judgment of more than $77 million against the Richmond companies, including findings that they obtained judgments "by filing false affidavits in New York state courts."

Consumer vs business

The FTC's Credit Practices Rule bars lenders from taking a "cognovit or confession of judgment" in consumer credit. But the rule defines a consumer as a person seeking money "for personal, family, or household use". Business funding falls outside it, which is why these clauses still turn up in business contracts.

Sterling's take: a funder that needs the right to skip the courtroom is telling you something about how it plans to collect.

What to do next

1. Search the contract for "confession of judgment", "affidavit of confession" or "warrant of attorney".
2. If you find one, ask for it to be removed. Compare against offers that don't include one.
3. Never sign a blank or undated confession.
4. If a judgment has already been entered against you, contact a lawyer straight away. There may be grounds to vacate it, especially if the default was disputed or the filing was in the wrong place.
5. Read how to spot funding scams for other warning signs in a contract.