Aiming to protect small businesses from entering potentially harmful confession of judgement (COJ) agreements with creditors, legislation sponsored by Assemblywoman Yvonne Lopez was approved Thursday by the Assembly Financial Institutions and Insurance Committee.
A confession of judgement is a signed agreement under which a defendant accepts liability and damages to resolve a dispute without going through normal court proceedings. However, defendants forfeit their right to defend themselves before a judge if they are ever sued for defaulting or not paying a debt. Judgement may be entered against a defendant without giving them advance notice. Some COJs also include a personal guarantee, which could extend liability for the debt to include a business owner’s personal finances, assets and credit.
Business owners may be asked to sign a COJ when taking out a loan, financing a line of credit or entering a commercial lease.
Many states have invalidated COJs altogether. While such agreements are still permitted under New Jersey law, most statues restrict or prohibit their use. The bill (A-5963) goes a step further in restricting COJs in New Jersey by prohibiting them in all new commercial financing contracts.
“Confessions of judgement go against a person’s legal right to due process,” said Lopez (D-Middlesex). “In taking away someone‘s right to defend themselves, COJs strip them of one of the principle values of our legal system. This practice must be stopped.”
Federal guidelines prohibit COJs in consumer and residential transactions. This means most victims of COJ agreements are businesses, particularly small business owners who depend on financial assistance from creditors or other entities.
“After the financial crises of 2008, lenders used confessions of judgement as a way to resolve disputes with borrowers. This proceeded to further hurt business owners who were already suffering,” said Lopez. “We need to take action to prevent this from happening to more people in the future, especially in the event of an economic downturn.”
The bill now goes to the Assembly Speaker for further consideration.