9 Things to Know About Confessions of Judgment in MCA Contracts

This is the part that catches people off guard. A confession of judgment isn't a separate document you would have noticed. It's embedded in the MCA agreement you signed — sometimes it's a clause in the main contract, sometimes it's a standalone affidavit buried in the paperwork stack your funder sent you at closing.

The language looks something like this: "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 starts. You signed it when you were focused on getting funded, not on reading page 8 of a 14-page agreement. The MCA companies know this. They designed it this way.

A normal creditor who wants to collect from you has to sue you. File a complaint. Serve you. Give you time to respond. Go through discovery. Maybe go to trial. That process takes months, sometimes over a year.

A confession of judgment skips all of that. Every single step.

The funder takes your signed COJ affidavit, files it with the county clerk (usually in New York), and the clerk enters a judgment. Done. No judge reviews it. No hearing happens. You don't get a phone call, you don't get a letter, you don't get a chance to explain your side. The first time you find out is when your bank account is frozen and you can't make payroll.

That's not an exaggeration. That is the standard process.

Here's the part that makes this feel unfair, because it is. The Federal Trade Commission recognized in 1985 that confessions of judgment were so dangerous, so fundamentally one-sided, that they banned them in consumer credit contracts entirely. The FTC's Credit Practices Rule (16 CFR 444.2) made it illegal for any lender to include a COJ clause in a consumer loan.

But here's the gap the MCA industry lives in: that rule only applies to consumer credit. Merchant cash advances are structured as commercial transactions — a purchase of future receivables, not a loan. That classification means the FTC ban doesn't touch them.

So the federal government looked at confessions of judgment, said "these are too abusive for consumers," and banned them. But because your MCA is technically a "commercial transaction," you don't get that protection. You're a business owner, so you're on your own.

This was the playbook for years. MCA funders are overwhelmingly based in New York. Your MCA contract almost certainly has a New York choice-of-law provision and a New York forum selection clause. So when the funder decides to file the COJ, they file it in a New York county court — even if your business is in Texas, Florida, California, or anywhere else.

Between 2014 and 2018, MCA funders filed over 25,000 confessions of judgment in New York courts. Bloomberg Businessweek exposed the practice in a 2018 investigation that won journalism awards and triggered a legislative response.

In August 2019, New York amended CPLR § 3218 to prohibit filing COJs against out-of-state borrowers. That was a significant reform. But if you're a New York-based business, you're still fully exposed. And some funders have found workarounds — venue manipulation, alternative legal pathways, choice-of-law provisions that pull enforcement into funder-friendly jurisdictions.

If your contract says "New York law governs," pay attention. That's not boilerplate. That's strategy.

Once the funder has a judgment (which, remember, they got without telling you), they serve a restraining notice on your bank under CPLR § 5222. The bank freezes your accounts. Business accounts. Personal accounts if you personally guaranteed the MCA — and you almost certainly did.

The bank doesn't warn you. The bank doesn't call you first. The bank doesn't ask if there's been a mistake. They get the restraining notice, they freeze the money. That's how it works.

You wake up one morning and your operating account has $0 available. Your payroll bounces. Your vendors don't get paid. Your rent check gets returned. And you have no idea why until you start making phone calls.

This is the part that destroys businesses. Not the judgment itself — the freeze. A business can survive a lawsuit. A business cannot survive having its cash flow cut off overnight with no warning.

People confuse these two things constantly. They're very different.

A default judgment happens when someone sues you, serves you properly, and you fail to respond within the required timeframe. The court enters judgment because you didn't show up. But you were notified. You had the opportunity to defend yourself. You chose not to (or missed the deadline).

A confession of judgment is entered without a lawsuit at all. No complaint is filed. No summons is served. No clock starts running. The funder just files your pre-signed affidavit and the judgment appears. You waived your right to notice, your right to a hearing, and your right to present defenses — all in advance, all in that paperwork you signed at origination.

The distinction matters because your options for fighting back are different. And the timeline is different. With a default judgment, you have time. With a COJ, you have days.

The legal landscape is fragmented, and that fragmentation is part of the problem. But some states have taken action.

States that have banned or severely restricted COJs include California (banned effective January 1, 2023), Florida, Massachusetts, Indiana, and Alaska. At least 17 states void any pre-suit agreement to confess judgment.

States that still allow COJs in commercial transactions include New York (for in-state residents), Pennsylvania, Ohio, Illinois, Virginia, and New Jersey. Pennsylvania is one of the most funder-friendly jurisdictions in the country for COJ enforcement.

Here's the catch: even if your state bans COJs, your MCA contract probably has a New York or Pennsylvania choice-of-law provision. The funder may attempt to enforce the COJ under another state's rules. An experienced attorney can challenge these forum-selection clauses, but you have to act fast.

The state you live in matters less than the state your contract says governs. Read that again.

A confession of judgment is not a death sentence. Courts can and do vacate them. But the grounds matter, and you need to move immediately.

Under New York law, there are recognized bases for vacating a COJ:

Procedural defects are the most straightforward. The affidavit must state the sum for which judgment may be entered, authorize entry of judgment, identify the county where you resided when you signed it, and concisely state the facts giving rise to the debt. If any of those requirements aren't met — wrong county, improper notarization, the three-year filing window expired — the COJ can be challenged through a motion under CPLR Rule 5015.

Substantive defenses like fraud, duress, or usury require a separate plenary action (a full lawsuit). That's more expensive and slower, but it gives you the full evidentiary machinery of litigation. Courts have voided COJs where the triggering default never actually occurred, or where the MCA was recharacterized as a criminally usurious loan.

The recharacterization argument is powerful. If a court determines your MCA was actually a loan in substance (fixed repayment amount, no true reconciliation, recourse upon insolvency), the entire agreement can be voided as usurious. And if the agreement is void, the COJ falls with it.

But none of this helps you if you wait. Every day you delay gives the funder time to freeze your accounts and seize assets. The difference between acting on day 1 and acting on day 14 can be the difference between saving your business and losing it.

This is the thing that ties everything together. Confessions of judgment exist in MCA contracts because the MCA industry has structured itself to avoid lending regulations entirely. The transaction is called a "purchase of future receivables," not a loan. That classification means no usury caps, no Truth in Lending Act disclosures, no FTC Credit Practices Rule protections, and no federal oversight of the collection process.

The COJ is the sharpest tool in that unregulated toolkit. It lets funders enforce repayment faster than any traditional lender could, against borrowers who have fewer protections than any traditional borrower would.

The Supreme Court said in D.H. Overmyer v. Frick (1972) that confession of judgment clauses can be valid — but only if the waiver of due process rights was voluntary, knowing, and intelligent. The Court also said that a COJ obtained through a standard form contract, without meaningful negotiation, in a transaction with unequal bargaining power, might not meet that standard.

Think about when you signed your MCA. Were you negotiating the COJ clause? Did your funder explain what it meant? Did you have an attorney review it? Or were you focused on getting $50,000 in your account by Friday?

You already know the answer. And so does the court.