Bloomberg Businessweek has an interesting a brutal look at a rapidly growing trend in the business-to-business collections world, an obscure legal document known as a confession of judgment, and how it is costing business owners a lot of money.
The document, signed by an individual taking out a cash advance from a company, allows the lender to immediately begin seizing assets if a payment is missed, without the need of a trial. Many states have outlawed using the confessions, but one state that hasn’t is New York, which has been home to more than 25,000 judgments since 2012, according to the report. In a single month, one court clerk in Orange County, New York, issued 176 judgments against small businesses in 38 states. The aggregate total of the judgments was more than $800,000.
Business owners mentioned in the article talk about money being in bank accounts one day and being gone the next, without explanation. The owners took out merchant cash advances from a company, and in the process of applying for the advance, sign a confession of judgment. As soon as a payment is missed, the lender files the confession with the courts, which then allows the lender to assign the judgment to a marshal, who begins seizing assets.
“Your life is ruined by their contract,” said one small business owner.