Quick Answer: A confession of judgment is a clause buried in merchant cash advance contracts that lets the lender skip the courtroom entirely and take a judgment against your business — freezing your bank accounts and seizing assets — without ever notifying you or giving you a chance to defend yourself. The FTC banned these clauses in consumer loans in 1985, but they remain legal in commercial contracts in many states. If you signed an MCA with a confession of judgment clause, you still have options — including motions to vacate, usury defenses, and bankruptcy protection.
Related crisis help: if your business closed and you personally guaranteed the loan, here’s exactly what to do right now — before you sign or pay anything.
Expert Context: I’ve been helping people with debt since 1994, and I’ve watched the merchant cash advance industry weaponize confession of judgment clauses against small business owners for over a decade. After Bloomberg’s 2018 investigation exposed over 25,000 confessions of judgment filed in New York alone, I tracked the legislative response and enforcement actions that followed — including the largest mass vacatur of confessions of judgment in history. This isn’t theory. I’ve seen what these clauses do to real businesses.
If you’re a small business owner who took a merchant cash advance, there’s a clause in your contract that could let the lender drain your bank account without a single day in court. It’s called a confession of judgment, and it’s one of the most dangerous provisions in commercial lending — one that the federal government already banned in consumer loans because it was so abusive.
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That fear is exactly what fraudsters exploit. One MCA debt-settlement operator just pleaded guilty to defrauding more than 50 small businesses who were trying to escape advances like these.
Key Terms Defined
Confession of Judgment (COJ): A contract clause where the borrower agrees in advance to let the lender obtain a court judgment without notice, a hearing, or any opportunity to present defenses. Also called a “cognovit note” in some states. Defined under Cornell Law Institute.
Merchant Cash Advance (MCA): A lump-sum payment to a business in exchange for a percentage of future sales or receivables. MCAs are structured as commercial transactions, not loans, which allows them to sidestep many lending regulations.
Cognovit Note: A promissory note containing a confession of judgment clause. The term comes from the Latin cognovit actionem — “he has acknowledged the action.” Used interchangeably with COJ in many states.
CPLR 3218: New York’s Civil Practice Law and Rules section governing confessions of judgment — amended in 2019 to prohibit filings against out-of-state borrowers.
How a Confession of Judgment Works in an MCA Contract
Here’s what happens in practice. When you sign a merchant cash advance agreement, buried in the fine print is a clause that typically reads something like: “The undersigned irrevocably authorizes any attorney to appear in any court of competent jurisdiction and confess a judgment without process in favor of the creditor.”
That single sentence means you’ve already agreed to lose before any dispute even starts. If the MCA company decides you’ve defaulted — and they get to define what “default” means — they can:
- File the confession of judgment in court without telling you
- Get a judgment entered against you the same day
- Freeze your business and personal bank accounts
- Garnish your receivables
- Place liens on your business assets
You don’t get a phone call. You don’t get a letter. You don’t get a hearing. The first sign something is wrong is usually when your bank account is frozen and you can’t make payroll.
As I wrote in my guide on what happens when you default on a merchant cash advance, the MCA industry operates in a regulatory gray zone — and confession of judgment clauses are one of the biggest reasons why.
Why the FTC Banned COJs for Consumers — But Not for Businesses
The Federal Trade Commission recognized how dangerous these clauses are. In 1985, the FTC’s Credit Practices Rule (16 CFR 444.2) made it an unfair trade practice for any lender to include a confession of judgment clause in a consumer credit contract. The rule was clear: confessions of judgment deny consumers “any opportunity to present meritorious defenses in lawsuits.”
But here’s the gap that the MCA industry exploits: that FTC rule only applies to consumer credit. Merchant cash advances are structured as commercial transactions — a purchase of future receivables, not a loan. That means the FTC’s ban doesn’t touch them.
The Claim: “A confession of judgment is just a standard business clause — every commercial contract has one.”
The Reality: Confessions of judgment are so extreme that the FTC banned them in consumer contracts, the U.S. Supreme Court flagged them as potentially unconstitutional in adhesion contracts (D.H. Overmyer v. Frick, 1972), and multiple states have outlawed them entirely. Most legitimate commercial lenders don’t use them. Their prevalence in MCA contracts is a red flag, not a standard practice.
Which States Allow Confessions of Judgment?
State laws on confessions of judgment vary dramatically. Here’s what you need to know about where you stand:
States That Ban or Severely Restrict COJs
- New York — Since August 2019, COJs cannot be filed against out-of-state borrowers. The amendment to CPLR 3218 was a direct response to Bloomberg’s investigation of MCA abuses. In-state businesses still face COJs but with stricter filing requirements.
- New Jersey — Prohibits confessions of judgment in business financing contracts with NJ debtors (effective 2020).
- California — COJs ruled unconstitutional in 1978. As of January 2025, the Rosenthal Fair Debt Collection Practices Act extends consumer-style protections to small business MCA debts.
- Indiana — Completely prohibits COJs and cognovit notes. Obtaining one is a Class B misdemeanor.
- Texas — Does not permit confessions of judgment in most circumstances.
- Alaska — Complete ban on confessions of judgment.
States That Still Allow COJs
- Pennsylvania — Allows COJs in commercial transactions with specific formatting requirements (bold type, separate signing).
- Ohio — Permits cognovit notes with strict procedural requirements.
- Michigan — Allows COJs with special labeling requirements.
- Virginia, Maryland, and others — Various restrictions apply; consult a local attorney for your state’s current rules.
The critical thing to understand: even if your state bans confessions of judgment, many MCA contracts include a forum selection clause that says disputes will be resolved in New York or Pennsylvania — states that still allow COJs. Before New York’s 2019 reform, MCA companies routinely filed confessions of judgment in New York against business owners who had never set foot in the state.
The Bloomberg Investigation That Changed Everything
In 2018, Bloomberg Businessweek published a five-part investigation called “Sign Here to Lose Everything” that exposed how the MCA industry had weaponized confessions of judgment. The investigation won the Taylor Family Award for Fairness in Journalism from the Nieman Foundation at Harvard.
Bloomberg’s reporters analyzed thousands of New York court records and found that over four years, cash advance companies had used confessions to obtain more than 25,000 judgments against borrowers across the country, worth an estimated $1.5 billion. The reporting showed that MCA funders were filing thousands of confessions in a handful of New York counties, targeting out-of-state businesses that couldn’t effectively respond.
The legislative response was swift. In August 2019, Governor Cuomo signed the amendment to CPLR 3218, explicitly stating the change was made “to remedy abuses in the use of confessions of judgment by creditors against out-of-state debtors.”
Yellowstone Capital: The $1 Billion Reckoning
In January 2025, New York Attorney General Letitia James announced a $1.065 billion judgment and settlement against Yellowstone Capital — one of the largest MCA companies in the country. The AG’s investigation found that Yellowstone had exploited small businesses through fraudulent loans with interest rates as high as 820% per year, far exceeding New York’s 16% civil usury cap.
The settlement included:
- Cancellation of $534 million in outstanding debt owed by over 18,000 small businesses
- Vacatur of over 1,100 court judgments — the largest mass vacatur of confessions of judgment in history
- A $16.1 million immediate payment toward the remaining $514 million judgment
- Permanent ban of Yellowstone and its officers from the MCA industry
This is exactly the kind of predatory lending pattern I’ve been writing about for years. The MCA industry has been driving small businesses into bankruptcy, and confessions of judgment have been one of their most powerful tools.
What to Do If You Have a Confession of Judgment in Your MCA Contract
If you’ve already signed an MCA with a COJ clause, don’t panic. Here’s what you need to know:
If a COJ Has NOT Been Filed Against You Yet
- Review your contract carefully — Look for language about “confessing judgment,” “cognovit,” or “waiving right to notice and hearing.” Many business owners don’t realize the clause exists until it’s too late.
- Check your state’s laws — If you’re in a state that bans COJs, the clause may be unenforceable regardless of what the contract says.
- Consult a business debt attorney — Before you miss a payment, talk to someone who handles MCA disputes. Prevention is far cheaper than fighting a filed judgment.
- Consider your options proactively — If you’re struggling with MCA payments, address it now. As I always tell people: treat your business like a business. Make decisions from a boardroom, not a panic room.
If a COJ Has Already Been Filed Against You
Time is critical. If a confession of judgment has been filed and your bank account is frozen, every day you wait gives the MCA company more time to seize assets. Act immediately. If your account is already frozen, here is exactly what to do in the first 48 hours.
You may have grounds to vacate (cancel) the judgment:
- Procedural defects — Wrong county, improper notarization, expired three-year filing window, missing residency information. These are often the fastest path to relief under CPLR Rule 5015.
- Jurisdictional challenges — If you’re an out-of-state business and the COJ was filed in New York after August 2019, the filing may be void under the amended CPLR 3218.
- Usury defense — If the MCA is actually a loan (fixed payments, regardless of business revenue), state usury laws may apply. Courts have increasingly found that some MCAs are disguised loans.
- Fraud or duress — If you were misled about the terms or pressured into signing without understanding the COJ clause, that’s a basis for vacatur.
- Default didn’t occur — If the MCA company claims you defaulted but you were making payments as agreed, the COJ filing may be improper.
Bankruptcy as a Defense Against Confessions of Judgment
Here’s something most people don’t realize: filing for bankruptcy immediately stops a confession of judgment in its tracks. The automatic stay under 11 U.S.C. 362 halts all collection activity, including enforcement of COJ judgments, bank account freezes, and asset seizures.
For small business owners buried under MCA debt, a Chapter 7 or Chapter 11 bankruptcy can:
- Immediately stop all COJ enforcement and bank freezes
- Discharge the underlying MCA debt (in Chapter 7)
- Allow restructuring of business debts (in Chapter 11)
- Void preferential transfers the MCA company may have already taken
I filed bankruptcy myself in 1990 after my real estate business collapsed. It wasn’t a failure — it was the smartest financial decision I ever made. It stopped the bleeding and let me rebuild. Take the Find Your Path quiz to see which option makes the most sense for your situation.
Got an MCA contract you’re not sure about? Use the Contract Decoder to analyze the terms and identify red flags like confession of judgment clauses, personal guarantees, and hidden fees.
Key Takeaways
- A confession of judgment lets an MCA lender get a court judgment against you without notice, a hearing, or any chance to defend yourself.
- The FTC banned COJs in consumer contracts in 1985 — but MCA companies exploit the gap by classifying advances as commercial transactions.
- New York banned COJ filings against out-of-state borrowers in 2019 after Bloomberg exposed 25,000+ abusive filings worth $1.5 billion.
- Multiple states now ban or restrict COJs: California, Indiana, New Jersey, Texas, and Alaska among them.
- If a COJ has been filed against you, you may be able to vacate it on procedural, jurisdictional, usury, or fraud grounds.
- Bankruptcy’s automatic stay immediately halts COJ enforcement and can discharge the underlying MCA debt.
The Bottom Line
If you’re reading this because an MCA company just froze your bank account and you can’t make payroll, I want you to know something: you are not the only business owner this has happened to, and you are not trapped. A confession of judgment clause feels like the end because it was designed to make you feel that way — to make you believe you have no options so you stop fighting. That’s a lie. Businesses survive this every day. Courts vacate these judgments. Bankruptcy stops them cold. The MCA industry counted on you not knowing your rights. Now you do. The next step is talking to an attorney who handles MCA disputes — not tomorrow, today. Your business is worth fighting for.
Part of a Research Series: This post is part of Merchant Cash Advances: The Research and Data the Industry Doesn’t Show You — a complete collection of research on merchant cash advances for small business owners.
Frequently Asked Questions
What is a confession of judgment in a merchant cash advance?
A confession of judgment is a clause in an MCA contract where you agree in advance to let the lender obtain a court judgment against you without notice or a hearing. If the MCA company claims you defaulted, they can file the COJ in court and immediately freeze your bank accounts and seize business assets — all without ever telling you first or giving you a chance to dispute the claim.
Can a confession of judgment be vacated?
Yes. A COJ can be vacated (cancelled) if there are procedural defects in the filing, jurisdictional issues (like filing against an out-of-state borrower in New York after 2019), usury violations, fraud, or duress. An attorney experienced in MCA disputes can file a motion to vacate under CPLR Rule 5015 or equivalent state procedures. Courts have increasingly sided with borrowers, especially when the MCA is found to be a disguised loan subject to usury laws.
Which states ban confessions of judgment?
Several states ban or severely restrict confessions of judgment, including California (unconstitutional since 1978), Indiana (Class B misdemeanor to obtain one), Alaska (complete ban), Texas, New Jersey (banned in business financing contracts, 2020), and New York (banned against out-of-state borrowers since 2019). State laws change frequently, so consult a local attorney for the most current rules in your jurisdiction.
Is a merchant cash advance a loan?
MCA companies say no — they structure advances as a purchase of future receivables, not a loan. But courts are increasingly looking at the actual terms. If the MCA requires fixed daily payments regardless of your business revenue, it may legally qualify as a loan — which means state usury laws, lending regulations, and the FTC’s ban on confessions of judgment in consumer credit could all apply. The Yellowstone Capital case established that MCAs with fixed repayment terms can be treated as usurious loans.
What should I do if my bank account was frozen by an MCA company?
Act immediately. Contact a business debt attorney who handles MCA disputes — many offer free consultations. They can file an emergency motion to unfreeze your accounts while pursuing a vacatur of the judgment. If the situation is dire, filing for bankruptcy triggers an automatic stay that immediately halts all collection activity, including bank freezes. Do not wait and hope the situation resolves itself — every day you delay gives the MCA company more time to drain your assets.
If a confession of judgment already led to your bank account being frozen, see my crisis guide on what to do right now when an MCA company freezes your bank account for the emergency steps and deadlines.
Dealing With Debt? Understanding your options is the first step. See how all your debt relief options compare — including ones most sites won’t tell you about. The Find Your Path quiz gives a recommendation based on your actual numbers, and the Scam-O-Meter checks any company’s complaint history before you sign. Federal Reserve research shows bankruptcy filers recover faster than those who don’t file.
