Is a merchant cash advance confession of judgment (COJ) wreaking havoc on your small business?
If you recently defaulted on a merchant cash advance, you might be surprised to find out that the MCA company got a judgment against you in court. Now, your bank accounts are frozen and you’re wondering how this happened. After all, you didn’t even receive a notice that you were being sued.
Most likely, your original MCA contract included a confession of judgment (COJ) clause. This allows the MCA provider to pursue legal action against you if you breach the contract — without telling you.
Read on to learn more about how a confession of judgment works and what to do if you signed one.
What Is a Confession of Judgment?
A confession of judgment is a written statement — usually a clause within a contract — that says a debtor agrees to allow their creditor to obtain a judgment against them in court, without any notice or hearing, if they fail to make their payments according to the terms of the contract. The debtor also waives their right to defend themselves in court.
If your MCA contract contains a COJ and you default on payments, the MCA provider can get a judgment against you in court without notifying you of the lawsuit or giving you the chance to defend yourself.
So what is a judgment? It’s the official result of the lawsuit in which the court determines the creditor is owed the debt in question. With a judgment, the creditor has much stronger tools to collect the debt from you, including bank account garnishments, liens, and more.
Is a Merchant Cash Advance Confession of Judgment Legal?
Not surprisingly, confessions of judgment are pretty controversial. Many critics say that they facilitate predatory lending practices. The Federal Trade Commission (FTC) bans confessions of judgment for consumer contracts, but not for commercial contracts.
That’s why some states have banned the use of confessions of judgment from commercial contracts as well (such as MCAs). Those states include Massachusetts and Florida. Still, they are legal in several states. This includes New York, Pennsylvania, Illinois, Texas, Virginia, and others.
Some states that do allow confessions of judgment have placed restrictions on how they can be used. New York, for instance, recently passed a law that limits the use of COJs against out-of-state debtors. It’s likely that as the predatory practices of merchant cash advance companies continue to come to light, more states will pass laws restricting or banning the use of COJs.
How a Merchant Cash Advance Confession of Judgment Impacts Your Business
A confession of judgment is a fairly standard clause within an MCA contract. However, any problems with MCA payments could have severe consequences for your business and your personal finances.
Once a judgment has been filed, your MCA provider can take immediate action to collect the debt you owe. They can freeze your bank accounts and place liens against your business assets and future receivables. They can also contact your customers or vendors and demand payment directly to them, and more.
And if your business isn’t able to pay back the MCA, you may be personally liable.
Should You Sign a Confession of Judgment?
Even though many MCA contracts include a confession of judgment, it doesn’t help you in any way. COJs exist to help creditors expedite the process of getting a judgment against you without having to file a lawsuit or spend time in court. The situation can be damaging to your business and finances, and may be hard to recover from.
You might be thinking: “But I don’t plan to default on my MCA.”
Of course, most people take on debt expecting to pay it back without any problems. Unfortunately, it’s impossible to predict the future. Sometimes, extenuating circumstances can cause your business to lose revenue even if you continue doing everything right. That’s why it’s best to avoid signing a confession of judgment if you can.
On the other hand, avoiding a contract with a COJ may significantly limit your options for getting a merchant cash advance. Even without a merchant cash advance confession of judgment, these contracts contain complex language. This language can be hard to understand and may leave you personally liable for unpaid MCA debt. Plus, they are very expensive and can lead to a cycle of debt that’s hard to break. Before signing an MCA agreement or agreeing to the terms and taking the funds, it’s important to seek legal counsel first.
Ideally, if you need financing for your business, you should explore MCA alternatives. Traditional business loans, for instance, come with much better terms and have more protections in place.
How to Reverse a Confession of Judgment
Once a judgment has been filed against you, you’re on the hook for paying the debt. However, there may be steps you can take with the help of an MCA law firm to lessen the damage.
First, you may be able to file a motion to appeal the ruling if you believe the lender didn’t follow the right procedures. If the motion is successful, the court can vacate the judgment. If you go this route, be sure to do so within the time limit. The time limit could be anywhere from 30 days to one year. Also, make sure there is a valid legal reason to file the motion. If the court deems it was frivolous, it will dismiss the motion. The court will also make you responsible for additional court fees incurred by the other party. This is why it’s important to seek out an experienced business attorney familiar with bringing motions and other actions against MCA providers.
Also, if there were inaccuracies when the judgment was reported to the credit bureaus, you might be able to dispute those errors with the court and/or bureau to have it removed. This will ensure your credit score isn’t damaged by inaccurate information.
Get Legal Help With a Merchant Cash Advance Confession of Judgment
Dealing with MCA problems is not something you should do alone, especially if a judgment was filed against you. It’s important to have an experienced legal team on your side that understands the complexities of MCAs and can help you resolve your MCA debt.
Tayne Law Group has been assisting individuals and business owners resolve debt for more than 20 years. If you’re struggling with an MCA or any other type of debt, reach out to our team for a free, no-obligation phone consultation. Call today for free at (866) 890-7337 or fill out our short contact form, and we’ll respond as soon as possible. All conversations are confidential and we never share or sell your information.