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Merchant Cash Advance Confession Of Judgment: The Good, The Bad, and The Ugly

Merchant cash advances (MCAs) have become an increasingly popular form of alternative business financing in recent years. Unlike traditional bank loans, MCAs provide quick access to capital without requiring strong credit or collateral.However, MCAs also come with their downsides – namely high costs and predatory contract terms like confessions of judgment. So what exactly are confessions of judgment, and why are they so controversial in the MCA industry? Let’s break it down.

What is a Confession of Judgment?

A confession of judgment (COJ), also known as a cognovit note or warrant of attorney, is a powerful legal tool that creditors can use to collect debts. By signing a COJ, the debtor agrees to waive notice of a lawsuit and their right to defend themselves in court if they default on the debt.It allows the creditor to obtain a quick judgment against the debtor without having to file a formal lawsuit and prove their case. Once filed with the court, the COJ immediately becomes an enforceable judgment against the debtor

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.This judgment allows the creditor to seize assets, garnish wages, freeze bank accounts, and basically take any legal action to collect – all without giving the debtor a chance to respond or be heard in court. Scary stuff.

Why MCA Companies Love COJs

For MCA providers, COJs offer a fast and efficient way to get repaid when borrowers default. Rather than having to sue the merchant and wait months for a court decision, lenders can file the COJ and start seizing assets right away. This avoids legal costs that could end up exceeding the size of the advance


.However, consumer advocates argue this speed comes at the expense of due process. Borrowers lose their right to contest the debt or make their case before a judge.And the COJ gives lenders immense power to inflict serious damage on a business by freezing bank accounts and intercepting merchant processing deposits. Often the merchant isn’t even notified until after their accounts are emptied.

The Legality of COJs Varies By State

Currently only around 9 states allow COJs – Illinois, Maryland, Michigan, Minnesota, New Jersey, Ohio, Pennsylvania, Texas and Virginia

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. And their use is restricted in some cases.For example, New York passed a law in 2019 banning COJs against out-of-state merchants. This was in response to widespread abuse of New York’s COJ laws by MCA lenders across the country.So the enforceability of a COJ against a merchant really depends on where they’re located and the applicable state laws. Merchants should be aware of their rights in their particular state.

Common MCA Contract Terms Alongside COJs

MCA contracts are infamous for containing other one-sided terms alongside the COJ:

  • Daily repayment through ACH withdrawals – This allows the MCA provider to directly access the merchant’s bank account for daily payments. Failure to have sufficient funds triggers default.
  • Personal guarantees – Business owners are often required to personally guarantee the MCA, making them personally liable for the debt.
  • Short term duration – Many MCAs have terms under a year, with full repayment due in as little as 6 months. This can create unmanageable payment burdens.
  • High cost – MCA rates are expensive, often exceeding the legal interest rate caps imposed on loans in many states. Equivalent APRs can easily top 100%.

What Happens After a COJ is Filed?

Once a COJ is filed against a merchant, the impact is severe and immediate. Their bank accounts will be frozen and merchant processor instructed to divert all deposits to the lender


. Many businesses can‘t survive this sudden loss of operating capital.The business owner is also hit with a damaging civil judgment on their record. This can trash personal credit scores and make it impossible to obtain financing in the future.Judgments also accrue interest rapidly, so the debt can quickly snowball. In some states, judgments are enforceable for 10+ years and can be renewed indefinitely.This creates incredible leverage for the lender to pressure the merchant to promptly repay the debt. Many resort to desperate measures like taking out loans from family or high-interest lenders.

Recent Controversies & Reform Efforts

In recent years, there has been growing scrutiny around MCA providers‘ use of COJs. A Bloomberg article detailed many cases of alleged predatory behavior by MCA companies wielding COJs.Some notable controversies:

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  • Excessively large COJ amounts – COJs filed for 2-3x the amount actually borrowed.
  • Out-of-state COJs banned in NY still filed against NY merchants.
  • Lenders filing COJs over technical defaults like late payments.
  • COJs restricting borrowers’ legal options even in cases of lender fraud/misconduct.

In response, legislators have proposed reforms such as:

  • Banning COJs in MCA contracts altogether


  • Requiring disclosures about COJs in easy-to-understand language.
  • Allowing merchants to still contest COJs for reasons like fraud and unfair lending.
  • Limiting enforceability of COJs obtained under false pretenses.

So far progress has been limited, but efforts continue in multiple states to rein in abuse of COJs in the MCA industry.

What To Do If You’re Facing a COJ?

If you find out a lender has filed a COJ against your business, stay calm but act quickly. Here are some tips:

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  • Consult an attorney – An experienced lawyer can review the COJ’s validity and help respond appropriately.
  • Try negotiating – Offering a settlement or payment plan may stop the lender from enforcing the COJ while a solution is worked out. Get any agreements in writing.
  • File an appeal – If there are legitimate grounds like fraud or improper process, consider appealing the judgment.
  • Seek damages – Sue the lender if you have evidence of unlawful behavior in obtaining/enforcing the COJ.
  • Explore bankruptcy – Filing for bankruptcy may help halt collection efforts and discharge part of the debt.
  • Shift assets – Open new bank accounts so all funds aren’t frozen. Alert vendors/customers about the situation.

The specific action depends on the circumstances, but the worst thing to do is nothing. Tackle the problem proactively and skillfully to minimize damage.

How To Avoid COJs in the First Place

Of course, it’s best to avoid COJs altogether when seeking financing:

  • Read contracts carefully – Don’t rush into signing anything without fully understanding the terms. Have an attorney review if needed.
  • Understand your rights – Be aware of applicable state laws and restrictions surrounding use of COJs.
  • Consider alternatives – Traditional SBA loans and business lines of credit don’t require COJs. Explore options.
  • Negotiate contract terms – Don’t be afraid to push back on objectionable clauses. Walk away if needed.
  • Limit personal liability – Form a separate business entity so personal assets aren’t vulnerable in a lawsuit.

With vigilance and prudence, merchants can still access needed working capital through MCAs without handcuffing themselves with a confession of judgment.

In Conclusion

COJs allow MCA lenders to obtain swift judgments against defaulting borrowers. This power is easily abused, as evidenced by recent controversies in the industry.Merchants need to educate themselves on the risks of COJs and their legal rights in their state. With proper precautions, MCA financing can still be secured without signing away all legal defenses.

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