You may have heard mention of a legal document called a “Cognovit Promissory Note.” What exactly is it? When would you ever need one? OK, here’s how it works. Suppose that you lend $10,000 to someone. They give you their “regular” promissory note — which is essentially their IOU that they will repay you,  per the terms of the Note. If they fail to repay you on time, your remedy is to sue them in court for breach of contract.  If you’ve ever been party to a lawsuit, you know how long that can take, and how many defenses a particularly creative defendant can throw in your way in order to prolong the decision.

Enter the “Cognovit” Note, which states on its face that as soon as the borrower defaults (i.e., misses a payment), you can go into court and obtain a judgment against him — even on the same day. It also means that the borrower waives any defenses to the judgment. An important part of a correctly drafted Cognovit Note is clause in which the borrower authorizes any attorney to go into court and obtain the judgment against the borrower (referred to as a “warrant of attorney”).

Why would any borrower agree to this? Simply because in those cases where the borrower does not have substantial collateral to support a loan, the only way a lender will lend money is on the basis of a Cognovit Note. In the end, it is a cost effective, efficient and quick way to protect a lender from default. This of course assumes that once the lender obtains the Cognovit Judgment, the borrower has assets from which to collect on the default.

You should note that Cognovit Notes are only legal in  Ohio, Delaware, Virginia, Pennsylvania, and Maryland.