”I own a business that’s falling behind on a debt. I know I owe the money, but I just don’t have it to pay. The creditor is willing to work out a payment plan, but only if I first sign a confession of judgment. In the meantime, I’m thinking about bankruptcy. But before I even consider the difference between a payment plan and bankruptcy, I need to understand what happens with the confession of judgment. What exactly is it, and what does it do? I’d like you to explain the confession to me before we compare it to bankruptcy.” Plenty of owners ask some version of that question. The answer starts with how a creditor normally gets a judgment.
Think of a regular lawsuit as a head-to-head: the plaintiff says it was harmed, the defendant is the one to blame. A judgment is the law’s answer about who is right. When a lawsuit is already underway and the debtor agrees to pay a known debt but lacks the cash, the two sides can agree to a Stipulation for Judgment in court. That stipulation can operate right away or only if the debtor fails to follow a payment schedule. If, however, there is no lawsuit at all and a creditor wants a quick settlement and the ability to enforce a judgment without filing suit and incurring the cost and risk of trial, the creditor may request a confession of judgment.
Imagine you sign a sheet that says “I admit I owe you $50,000” and you sign away your right to a trial. That’s what a confession of judgment is. It’s not a court ruling; it’s a contract, or a clause in a contract, where you agree that if you default, the creditor can jump straight to judgment. This can only be done before a lawsuit is even filed. Because it throws away big constitutional protections like due process, courts put it under a microscope and make you meet very strict rules before they’ll let it stick.
How It Works in California
Here’s how it works in California. The debtor signs a written confession under oath, and an independent attorney prepares a declaration along with it. The papers go to the court clerk, and they can be entered in any court that has jurisdiction over the amount owed. The judge then signs the judgment, listing the principal, accrued interest, and costs. Sometimes the creditor just sits on the signed confession and never files it as long as you are paying the payments you agreed to; if you pay everything off, the creditor gives you back the document unfiled. Don’t forget to write down exactly what payment amounts are expected so no one can dispute it later.
The debtor signs and, right there, “confesses judgment” for a certain sum - often the original debt plus interest and the creditor’s attorney fees. That same document authorizes the court to enter judgment against the debtor for that total. Then the attorney signs a declaration saying he looked over the judgment, told the debtor what rights were being given up, and recommended using the confession. This tells the court the debtor is signing voluntarily, knowingly and intelligently, after having received independent legal advice.
The independent lawyer is there because by signing the confession of judgment, you are giving up the right to a jury trial, the right to cross-examine witnesses and so on, and the California courts will not allow you to do that without counsel. Who is that lawyer? It cannot be the creditor’s lawyer, even if you sign a conflict waiver. If you don’t have a lawyer, then your confession is void. Moreover, the confession of judgment is not valid if the only signature on the certificate is your own, even if you are an attorney, or if the attorney has represented both you and the creditor in the past, even if you have a written waiver.
Once the confession is filed, you don’t get another seat at the table. It’s an immediate judgment, and the creditor can use every collection weapon available after a full trial: writs of execution, wage and asset attachment, abstracts of judgment to cloud title, the works. The due process clause of the Fourteenth Amendment guarantees you notice and a chance to be heard before a judgment can be entered against you. This is why the attorney declaration is there: in Isbell v. County of Sonoma (1978) the California Supreme Court said that a confession of judgment entered without an attorney’s declaration was unconstitutional.
Even when done properly, a confession of judgment is extreme. It’s allowed in some states, like California. In other states, it must be specially labeled, or it may be allowed in other limited circumstances. And in other states, it’s illegal, meaning any provision in which the debtor agrees to confess judgment prior to the commencement of an action is void. In a bankruptcy, or other creditor-debtor case, a confession of judgment is also known as a “cognovit judgment.”
A Faster Path to Getting Paid
Ask creditors why they insist on it. It means a faster path to getting paid because they already have the judgment; all they need is to enter it. If they don’t have it they will have to file a lawsuit and wait months or longer to get a judgment either by stipulation or after trial. Then there’s the expense and delay of discovery and trial, which the confession of judgment avoids. Since the collection game is often a rush among many creditors trying to take a small pool of assets, a creditor with a confession of judgment might be a month or so from having writs of execution, while the others may still be six months to two years from a judgment and therefore way behind the eight ball on getting to the assets first.
To a creditor, a confession is a test. Think of it this way: if you really intend to stick to the payment plan you’re offering, why would you be afraid to sign it? On the other hand, if you miss a payment, it’s a quick road to a judgment against you. A creditor will scrutinize any debtor who blows him off when the debt is admitted. Many business owners make the mistake of saying they can’t afford independent legal counsel. Most attorneys will sign this off for less than five hundred dollars, which is about what it costs to file an Answer in court. Spend the money only if you truly intend to pay.
The Federal Trade Commission Credit Practices Rule prohibits a confession of judgment clause in advance from being included in a consumer contract. To be sure, the FTC says the rule does not interfere with a creditor’s right to repossess secured property; it only protects due process. A creditor may file suit and serve the debtor if the debtor refuses to sign a confession of judgment. The debtor might change his mind after he is served, and in that case the creditor may enter a stipulation for judgment, which does not need to meet the same due process requirements as a pre-judgment confession because the debtor is already a party to the case.
The Takeaway
If you’re asking yourself why a business owner might sign a confession of judgment instead of filing for bankruptcy, here’s the takeaway: For a creditor, every day of delay means every other creditor gets a little more money, so creditors act fast. For the debtor, the confession of judgment gives the creditor enormous leverage: once you miss a payment, the creditor can file a judgment that it does not have to prosecute in court. Think about signing a confession of judgment from your side. It means you are giving the creditor all the cards at once. Make sure you fully understand that before you sign. If bankruptcy is on your list of options, put that question to the independent attorney who has to sign off on the confession anyway.
