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Confessions of Judgment. (Legal Jargon).

As a credit professional working for a supplier or contractor, you commonly receive requests from customers who have no problem with your company's performance but need more time to pay because of cash flow or related financial problems. You may be strongly inclined to work with the customer, both to preserve the commercial relationship and to avoid the time and expense of a lawsuit. However, what if the customer ends up not paying even after having been given more time? You still have to go through the time and expense of a lawsuit. Additionally, the customer, no longer concerned about your goodwill, may assert defenses which, while without merit, will require further time and money to overcome.

Many jurisdictions permit a solution: A "Confession of Judgment." The Confession of Judgment gets its name because the debtor "confesses" an amount due to a creditor before any lawsuit is filed, and the creditor can use it to obtain judgment if the debtor does not perform. You may require the customer to execute the Confession of Judgment in return for the credit extension, and if the customer defaults, you can use the Confession of Judgment to obtain judgment without trial, and cut off all defenses and appeals.

The Confession of Judgment sounds too good to be true. Indeed, since a Confession of Judgment requires the debtor to waive important due process rights, such as trial by jury, or trial at all, many states do not allow them, either at all or for certain types of transactions. Furthermore, even those jurisdictions that do permit Confession of Judgment impose significant procedural and practical hurdles. Nevertheless, when a Confession of Judgment is available, it is a powerful tool in the arsenal of a credit professional.

We suggest you consider the following issues in determining whether to request that the customer execute a Confession of Judgment:

1. Does the jurisdiction allow Confessions of Judgment at all?

Confessions of Judgment do not violate the United States Constitution or federal laws or regulations. Instead, it is up to the individual States whether to permit Confessions of Judgment. A significant number of states do not permit Confessions of Judgment as being against public policy. When the creditor and debtor are located in different states that have differing policies on Confessions of Judgment, legal counsel should be consulted on which state's law applies.

2. Does the jurisdiction permit Confessions of Judgment for the type of transaction involved?

Even if the jurisdiction permits Confessions of Judgment generally, it may not permit a Confession of Judgment for the type of transaction in which you are involved. For example, Uniform Consumer Credit Code [section] 2.415 prohibits any person to confess judgment on a claim arising out of a consumer credit sale or a consumer loan.

3. Document the Confession of Judgment carefully.

Even those jurisdictions which permit Confessions of Judgment strictly construe them against the creditor, requiring you to carefully dot your I's and cross your T's in documenting the Confession of Judgment and the circumstances under which it was executed. Boilerplate, "one-size-fits-all" documentation may not suffice; Confessions of Judgment must be clear, explicit and definite, and consent to judgment must be knowing, intelligent and voluntary.

Jurisdictions often impose additional hurdles. For example California requires that the debtor's attorney sign a certificate providing that the attorney has (1) reviewed the proposed judgment, (2) advised the debtor of his or her rights, and defenses being waived, and (3) advised the debtor to confess the judgment. This imposes a practical problem as well as a documentary burden; few attorneys generally are willing to sign such a certificate.

4. Is a Stipulation for Entry of Judgment another option?

A Stipulation for Entry of Judgment is a formal legal agreement between creditor and debtor by which a debtor agrees to have judgment entered against him or her after a complaint has been filed and answered by the debtor. The Stipulation for Entry of Judgment in essence is a post-lawsuit settlement agreement. If the debtor breaches the settlement agreement, the stipulation is filed with the court and judgment entered pursuant to its terms.

Many jurisdictions are more inclined to accept Stipulation for Entry of Judgment than Confessions of Judgment since Stipulations for Entry of Judgment occur after the debtor has had an opportunity to respond to a lawsuit, whereas Confessions of Judgment prejudge a lawsuit before it ever is filed. Some states, however, require a judgment entered upon a stipulation to comply with the same procedures as a judgment entered upon confession. Additionally, Stipulation for Entry of Judgment do have the downside of requiring the filing of a lawsuit, which does entail expense and may affect the customer's credit.

A Confession of Judgment enables a creditor to have its debtor "confess" an amount due to the creditor before a lawsuit is filed, and thereby allows the creditor to obtain judgment with little delay or cost in the event the debtor does not perform. A credit professional may require the customer to execute the Confession of Judgment in return for the credit extension, and if the customer defaults, the creditor can use the Confession of Judgment to obtain judgment without trial, and cut off all defenses and appeals. However, before adopting this course of action, the credit professional should confirm with legal counsel that the jurisdiction permits Confessions of Judgment and, if so, that the often strict requirements for Confessions of Judgment are met.

Jeffrey A. Kent is a member of Poindexter & Doutre, Inc. and Robert D. Schwartz is an associate with the same firm.
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Author:Kent, Jeffrey A.; Schwartz, Robert D.
Publication:Business Credit
Article Type:Brief Article
Date:Jan 1, 2002
Words:926
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