Confession of Judgment Clauses in Business Financing: What You Are Signing

What is a confession of judgment?

It is a written statement, signed before anything has gone wrong, in which the borrower (and often the owner as guarantor) consents to a judgment for the amount the lender says is owed, plus fees. Normally a creditor who wants a judgment has to file a lawsuit, serve you, and prove its case while you get the chance to respond. A confession of judgment skips those steps. The creditor files the signed document with a court clerk, along with its own statement of what is owed, and the clerk enters judgment.

A judgment is not just a piece of paper. It lets the creditor restrain or levy on bank accounts, place liens on property and garnish receivables, often within days. For a small business, a frozen operating account can mean missed payroll before the owner has even spoken to a lawyer. And because the judgment already exists, the burden shifts to you to go to court and ask for it to be vacated.

Is a confession of judgment legal?

It depends on the type of credit and the state. For consumers, the answer is mostly no: the FTC Credit Practices Rule (16 CFR 444.2(a)(1)) makes it an unfair practice for a lender to take a cognovit or confession of judgment in consumer credit. That rule covers credit to individuals for personal, family or household purposes. It does not cover business financing.

For businesses, the Supreme Court held in D. H. Overmyer Co. v. Frick Co. (1972) that a cognovit clause is not automatically unconstitutional when a business waives notice and a hearing voluntarily, knowingly and intelligently, for example after negotiation between parties with legal advice. The Court left room for challenges where the waiver was not knowing, and states remain free to restrict or ban the clauses. Many have.

Which states restrict confessions of judgment in business financing?

The rules form a patchwork, and they change. The table covers the states most relevant to merchant cash advances as of 2026. Many other states prohibit or sharply limit confessions of judgment generally, while a few still allow them in commercial deals with specific procedural requirements, so check the law of the state where you live and where the document would be filed.

How did confessions of judgment become an MCA problem?

For years, funders across the country had owners sign New York confessions of judgment, even when neither the business nor the owner had any connection to New York. Clerks in some counties entered the judgments with little scrutiny, and businesses in other states learned of them only when their bank accounts were frozen. After news reporting on the practice in 2018, New York amended CPLR 3218 effective August 30, 2019, so that a confession of judgment can only be filed in the New York county where the debtor lived when it was signed (or later moved to within the state). In practice that ended their use against out-of-state businesses for documents signed after that date.

Regulators have also gone after funders who used them aggressively. The New York Attorney General's January 2025 settlement with Yellowstone Capital, a $1.065 billion judgment, required the companies to cancel outstanding merchant debts and to vacate unpaid judgments for eligible businesses. Funders responded by moving toward other tools, such as fast-track arbitration and broad ACH authorizations, so removing a confession of judgment does not remove every collection risk.

What does the clause usually look like?

It may be a separate affidavit or a paragraph inside the guaranty. Typical wording reads something like: "Merchant and Guarantor hereby confess judgment in favor of Purchaser for the full Purchased Amount less payments received, plus default fees, attorney fees of 25% of the balance, and costs, and authorize Purchaser to file this affidavit in any court without further notice." Signs to look for:

• The words "confess," "confession," "cognovit" or "warrant of attorney" anywhere in the package.
• A notarized affidavit separate from the main agreement, sometimes with a county already filled in.
• Language that the funder alone decides the amount owed when it files.
• Attorney fees stated as a fixed percentage of the balance rather than actual reasonable fees.
• Both the business and the owner personally listed as confessing parties.
• A waiver of notice, of a hearing, of the right to a jury or of exemptions from collection.

Is a confession of judgment the same as an arbitration clause or a jury waiver?

No, and the difference matters. An arbitration clause moves a dispute out of court, and a jury waiver means a judge rather than a jury decides it, but in both cases there is still a proceeding: the funder has to make a claim, you get notice, and you can respond with your side of the story before anyone can collect. A confession of judgment removes that step. The judgment exists before you have said a word.

That is why removing a confession of judgment is worth more than most other edits to a financing agreement. If you have to choose where to spend your negotiating capital, a funder that sues or arbitrates must still prove the balance, deal with your reconciliation requests and answer any argument that the deal was really a loan. With a confession of judgment, you are arguing all of that after your account is already frozen.

A worked example

A restaurant owner in Pennsylvania takes a $60,000 advance and signs a package that includes a confession of judgment for the business and for herself as guarantor. Sales fall in a slow winter, she asks for reconciliation, and the funder does not respond. Two debits bounce. The funder declares a default, adds a default fee and attorney fees of 25% of the balance, and files the confession in a county court. Within days her business account and her personal savings account are restrained. She can still challenge the judgment, for example by arguing that the funder ignored a contractual reconciliation right, but she is doing it while unable to make payroll. Had the confession been struck, the funder would have needed to bring a claim first, and her reconciliation request would have been part of that dispute from the start.

How do you negotiate a confession of judgment out of the deal?

Ask for it to be removed entirely. That is a common and reasonable request, and in Texas or Virginia sales-based financing the clause would be void anyway. Many funders operate without one. If a funder insists, treat that as information about how it expects to collect, and compare it with offers that do not require one.

If you have no alternative and cannot get it removed, push for limits: the document may only be filed after a defined event of default, after written notice to you and a cure period of at least 10 business days; the amount is limited to the unpaid balance actually owed, minus all payments received; attorney fees are capped at actual reasonable fees; and it applies to the business only, not to you personally. Keep a copy of everything you sign, including the affidavit, because funders sometimes send it as a separate signature request.

What if a judgment has already been entered against you?

Act quickly. Gather the agreement, the confession of judgment, every payment record and all communications with the funder. Then speak with a commercial litigation lawyer in the state where the judgment was filed. Depending on the state, there may be grounds to vacate it, for example if it was filed in a county the statute does not allow, if the affidavit is missing required content, if the amount claimed is wrong, or if the agreement was really a loan at an unlawful rate. Deadlines can be short, and bank levies move fast.

If you signed with Yellowstone Capital, the New York Attorney General's settlement page explains who qualifies for relief. In some situations, a bankruptcy filing triggers an automatic stay that halts collection, but that is a significant step with its own consequences and needs advice. Do not move money between accounts to avoid a levy without legal advice; it can create new problems.

The Business Financing analyzer flags any confession of judgment in the documents you upload, including one tucked inside a personal guaranty, and explains which state rules may affect it, so you can ask for it to come out before you sign rather than after.