Using Confessions of Judgment and Release to Settle Troubled Credits
Creditors are constantly faced with the issue of how to maximize return on troubled credits. Whether an account is in the initial stages of being flagged “high-risk,” or the credit is clearly in default and collection appears to be the only option, creditors must weigh their options with an eye toward cost and likelihood of collection. Employing productive settlement strategies is critical.
One common settlement strategy that should always be explored is having the debtor sign a confession of judgment. A confession of judgment is simply a written acknowledgment by the debtor of the amount due or to become due to the creditor, and consent to entry of judgment against the debtor for that amount. This option is particularly attractive to a creditor when the creditor believes the debtor would be inclined to dispute the amount of the debt, assert disputed charge backs or credits or otherwise raise issues that would cause a collection action to become more time-consuming and costly.
Even if there is no collection lawsuit pending in North Carolina, the creditor and debtor can agree to record the confession of judgment immediately with the clerk of court in the county where the debtor resides, has its principal place of business or has real property. Judgments taken by confession have the same effect as any other judgment in North Carolina. If the debtor owns real property in the county where the judgment is recorded, a judgment lien is created, potentially giving the creditor a secured or partially secured claim against the debtor, which can greatly enhance future collection prospects, particularly in the event of the debtor’s bankruptcy. Recall, however, that judgment liens can be avoided as preferences if taken within the 90-day preference period preceding a bankruptcy filing.
Alternatively, the creditor may hold the confession of judgment and not record it so long as the debtor makes periodic payments toward the balance due in accordance with an agreed upon schedule. The debtor has incentive to make the payments to avoid recording of the judgment. However, the drawback of delayed recording is that other creditors may secure judgment liens ahead of you, giving them higher priority. Executions to collection on a confession of judgment may be issued and enforced in the same manner as upon other judgments.
As an added enhancement to the creditor in situations where there is concern the debtor may have claims against the creditor, a debtor who is willing to sign a confession of judgment also may be willing to sign a waiver and release of all claims at the same time. If the creditor is willing to hold the confession of judgment pending periodic payments, the creditor will be giving something of value in exchange for the debtor’s release, rendering it enforceable.
Even if entering into settlement and obtaining a confession of judgment appears to be delaying the inevitable, the confession of judgment eliminates all potential variables, thereby minimizing risks as well as legal expenses associated with obtaining judgment. Many debtors will be willing to sign a confession of judgment in the early stages of a default situation, while the debtor is still optimistic about the ability to comply with the settlement. That same debtor will rarely agree to sign an acknowledgment of debt or consent to judgment after the debtor has been forced to hire counsel to defend a lawsuit.
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