Edge Cases
Confession of Judgment in MCA Contracts: What It Means
A confession of judgment (COJ) is a contract clause where the borrower pre-waives the right to defend in court if the lender alleges default — allowing the lender to obtain a judgment and freeze bank accounts without a hearing. New York banned COJs in commercial transactions in 2019 (NY CPLR §3218) and Texas voided them entirely in commercial financing contracts via HB 700, effective September 1, 2025; they still appear in some out-of-state MCA contracts. Ask your broker explicitly before signing.
The full picture
What a confession of judgment actually does
A confession of judgment (COJ) is a legal instrument signed at contract execution that allows the lender — if it later alleges the borrower has defaulted — to walk into a court and obtain a judgment without notice, hearing, or any opportunity for the borrower to defend.
Why it matters for MCAs
Why it matters for merchant cash advances:
- Speed advantage to the lender — COJs let the lender freeze bank accounts and seize assets quickly on default allegation, before any court has heard the borrower's side
- Asymmetric risk — once filed, undoing a COJ-based judgment requires a separate legal action, often in the lender's home state, even if the underlying default claim is contested
- History of abuse — the COJ enforcement landscape (especially out of New York courts pre-2019) was a primary reason for the New York legislative ban
Where they still exist
Where they still exist: some out-of-state lenders use COJs in jurisdictions that still permit them. Federal commercial law has not banned COJs nationally, so the patchwork is real.
If you see COJ language in an MCA contract, ask the broker to walk you through it — and consider whether a different lender without COJ language is available at comparable pricing. Reputable brokers will tell you up front whether a contract contains COJ language.
Apply for business funding through ClearValue Lending to get matched with a lender for your needs.
Worked example — what a COJ filing looks like in practice
An operator with a $75,000 MCA misses two ACH debits during a 2-week revenue slump. The lender holds a signed COJ. Without notice or hearing, the lender files the COJ in its home-state court, obtains a judgment for the full remaining balance plus fees, and serves the operator's bank with a restraining notice — freezing the operating account within days. Undoing the judgment requires hiring counsel in the lender's state to challenge the default allegation, even if the operator can prove the slump was temporary.
Ask explicitly about COJ language before signing
COJ clauses don't always appear under the heading 'confession of judgment' — they can be buried in 'remedies' or 'consent to jurisdiction' sections. Ask the broker directly: 'Does this contract contain a confession of judgment or pre-signed affidavit of confession?' If you can't get a clear answer, walk.
Sources
- New York Civil Practice Law and Rules §3218 was amended in 2019 to prohibit confessions of judgment in commercial transactions involving a non-resident defendant — effectively ending the most common COJ enforcement venue for out-of-state operators. The amendment was a direct legislative response to documented abuses in the MCA industry. — NY CPLR §3218 (2019 amendment)
- The Federal Trade Commission's Business Opportunity Rule and unfair-or-deceptive-acts-or-practices (UDAP) framework under 15 U.S.C. §45 gives the FTC authority to pursue lenders using COJ clauses deceptively — but federal law has not expressly banned COJs in commercial lending nationwide. — FTC UDAP Authority
- CFPB's commercial financing oversight authority was expanded under Dodd-Frank Section 1071 — the Bureau's guidance on small business lending practices includes transparency in contract terms, though COJ-specific prohibition remains state-driven. — CFPB Small Business Lending
- New York's Attorney General obtained a $1.065 billion judgment in January 2025 against MCA funder Yellowstone Capital and 25 other funders it controlled, vacating unsatisfied court judgments and liens the companies had obtained against small businesses — a case built on the same judgment-without-a-hearing enforcement mechanism a COJ enables. — NY Attorney General press release, Jan. 22, 2025
- Texas became the newest state to act on COJ clauses: HB 700, signed June 20, 2025 and effective September 1, 2025, makes an entire commercial sales-based financing contract void — not just the offending clause — if it contains a confession-of-judgment provision. — Texas HB 700 (2025), Texas Finance Code §398.055
Key takeaways
- A confession of judgment lets the lender obtain a court judgment without trial if it alleges default.
- New York banned COJs in commercial transactions in 2019 (CPLR §3218); federal law has not banned them nationally.
- Out-of-state lenders may still include COJ language in MCA contracts.
- Always ask the broker explicitly whether the contract contains COJ language before signing.
- If COJ is present, look for a comparable-pricing lender without that clause before agreeing.
- Related: Why Business Loan Marketplaces Can Hurt Borrowers | California business lending landscape | New York business lending landscape
Frequently asked questions
Are confessions of judgment legal in every state?
No, and the landscape has shifted since New York's 2019 ban (NY CPLR §3218). New Jersey banned COJs in commercial financing agreements in 2020 (N.J.S.A. 2A:16-9.1), Virginia banned them specifically in sales-based (MCA-type) financing in 2022 (HB 1027), and Texas is the newest: HB 700, effective September 1, 2025, voids the entire commercial financing contract — not just the clause — if it contains a COJ provision. Pennsylvania, Ohio, and Maryland still permit them in commercial contracts. California restricts them in consumer loans but allows them in some commercial agreements. The key is the governing law clause in your MCA contract — an out-of-state governing law can expose a business to a COJ despite protections in its home state. Source: NY CPLR §3218; N.J.S.A. 2A:16-9.1; Virginia HB 1027 (2022); Texas HB 700 (2025); CFPB research on small business lending.
What happens if you sign a contract with a COJ clause and default?
If the MCA provider alleges a default — including a disputed one — they can file the pre-signed confession of judgment, obtain a court order, and freeze or levy your business bank accounts without advance notice or a hearing. For businesses with thin operating margins, a frozen account can paralyze payroll and vendor payments within days of filing. Source: NY CPLR §3218.
Can you negotiate out a COJ clause before signing an MCA?
Yes, but most MCA providers on standard terms will not remove it. Ask your broker explicitly whether the contract contains a COJ before signing. If you're in NY and the contract is governed by NY law, the 2019 ban may apply — but verify the governing law clause. Alternative lenders using SBA 7(a), bank term loans, or lines of credit do not use COJ clauses. Source: SBA 7(a) loan program (sba.gov/funding-programs/loans/7a-loans); NY CPLR §3218.
Related products
Published 2026-05-22 · Updated 2026-09-11 · https://clearvaluelending.com/answers/cojs-explained