IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Martin Kreshon III of North City Law (https://martinkreshon.com/):

The Creditor’s Perspective: A Streamlined Path to Collection

In Washington, a confession of judgment is a legal tool where a debtor admits to a debt and authorizes a creditor to obtain a court judgment against them without a lawsuit. This can happen before or after a lawsuit is filed. It’s essentially a pre-authorized judgment that can be filed with the court if the debtor defaults on their payment.

For a creditor, a confession of judgment is an incredibly valuable asset. The traditional route of debt collection through a lawsuit can be a long, expensive, and uncertain process. It involves filing a complaint, serving the debtor, going through discovery, and potentially a lengthy trial, all the while racking up extensive legal fees. A confession of judgment bypasses all of this, offering several key benefits:

• Speed and Efficiency: A creditor can get a legally enforceable judgment much faster. Instead of months or years of litigation, they can simply present the signed confession to the court.
• Reduced Costs: It eliminates the significant legal costs associated with a full-blown lawsuit, including attorney fees, court fees, and the time spent on preparing for and attending hearings.
• Certainty of Outcome: The outcome isn’t left to a judge or jury. The debtor has already admitted the debt and agreed to the judgment, removing the risk of losing the case.
• Immediate Enforcement: Once the court enters the judgment, the creditor can immediately begin collection efforts, such as wage garnishment, bank account levies, and liens on real property. This quick action can prevent the debtor from hiding or transferring assets.

The Debtor’s Perspective: A Calculated Compromise

While it may seem counterintuitive for a debtor to sign away their right to a trial, there are situations where a confession of judgment is a beneficial, albeit serious, choice. Often, the debtor is already in a difficult financial position and is trying to avoid further, more damaging consequences.

• Avoids Litigation: The most significant benefit is avoiding a costly and public lawsuit. The debtor doesn’t have to hire a lawyer and spend time and money defending themselves in court.
• Favorable Terms: In some cases, a creditor may offer more favorable payment terms in exchange for the confession of judgment. This could include a reduced principal amount, a lower interest rate, or a more manageable payment schedule. The debtor gets a chance to resolve their debt without the stress of a trial.
• Prevents Escalating Costs: By pre-authorizing the judgment, the debtor can limit the amount of additional fees and interest they’ll be responsible for. A lengthy lawsuit would only increase the total debt with added legal fees and accumulating interest.
• Securing a Loan or Deal: In a commercial context, a debtor with a limited or poor credit history may agree to a confession of judgment to secure a loan or a business deal that they would not otherwise be able to get.

The Legal Framework in Washington

The Revised Code of Washington, Chapter 4.60, authorizes confessions of judgment. For a confession of judgment to be valid in Washington, it must be in a signed and verified statement. The statement must also clearly specify the debt and concisely explain the facts from which the debt arose. It is crucial for a debtor to understand that by signing this document they are waiving their right to a trial and all associated legal defenses. While a confession of judgment can provide a path to resolution, it is a powerful tool with significant implications. It is strongly recommended that both creditors and debtors seek legal counsel to understand their rights and obligations before entering into such an agreement.

If you have questions relating to the content of this article or legal issues associated with selling or buying a business, Martin Kreshon would welcome the opportunity to answer them.  Mr. Kreshon can be reached at (206) 929-0609 and martin@northcitylaw.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.