As the country confronts the myriad economic challenges posed by our response to COVID-19, lawmakers and commentators have expressed special concern for how small businesses will weather the slow down or total shut down of operations necessitated by the social distancing efforts in force in states and municipalities across the nation. The current legislative efforts to help small businesses stay afloat while the economy is in a “medically induced coma,” should provide some relief. But the COVID-19 shutdown is poised to accelerate and exacerbate another looming financial and legal crisis facing small businesses—the use of “confession of judgment clauses” that permit creditors to prevail in lawsuits that are used to obtain judgments on loans allegedly in default without even providing the debtor of notice of the lawsuit. In New York state alone, these judgments have totaled over $1.5 billion in a recent six-year period.
With a confession of judgment or “cognovit note,” all the creditor needs to do is go to court with an allegation that the debtor has not paid on the loan in accordance with the contract, and produce the confession of judgment in which the debtor claims to have knowingly waived the right of notice. Armed with these documents, the creditor can obtain a legally binding and enforceable judgment against the debtor—all before the debtor has any idea that she has been sued, let alone the chance to defend herself in court. Typically, the first time that the debtor learns that she has been sued is when a bank account has been frozen or property seized as a means of enforcing the judgment.
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