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How can a confession of judgment hurt my business?

Entrepreneurs have fallen victim to a growing scam that uses a legal document as a weapon to strip away funds from growing companies. The fraud also relies on the New York court system and an owner’s eagerness to expand into new markets.

Bloomberg Businessweek reported a recent situation with a Floridian couple, the Duncans, who worked with a New York lender for a small business loan. Although they continued to make payments on time, they eventually lost over $52,000 from their bank account.

How did this happen?

Some lenders may abuse an arcane legal document in New York called a confession of judgment. The document allows borrowers to give up the right to defend themselves if a lender takes them to court over their loan.

The lender may use the confession to file claims against a borrower for missed payments and legally seize assets before the borrower knows. In the case of the Duncans, the couple claimed the lender forged a missed payment to take funds from their bank.

Why target small businesses?

The lenders intentionally choose businesses that cannot receive traditional loans from established banks due to size or income of the company. Often, the targets are florists, real estate agencies or contractors, who need more funds to expand.

The businesses can be located anywhere in the country. While the confession of judgment is valid only in New York, it can be used against any company as long as the bank the owner’s uses has an office in New York.

What can I do to prevent this?

Currently, there are over 25,000 reported cases around the United States, and it looks like there could be an increase into the future if New York continues the legality of a confession. It means more owners may find themselves in massive amounts of debt and lose their business.

Luckily, owners can use information about the confession of judgment to protect themselves from these situations. Entrepreneurs should take their time before agreeing to any loans and review all the documents as thoroughly before signing.

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