A promissory note is a legal document outlining the terms of a loan. It includes details such as parties involved, amount owed, collateral (if applicable), interest rate and more.
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Enforcement of a promissory note may prove challenging when its borrower does not repay their debt in full, however there are options available such as hiring professional collection agencies and filing a lawsuit.
Legality
A promissory note is a legally-binding agreement signed between borrower and lender that details repayment terms, unlike IOUs, loan agreements or mortgages that provide more informal or uncertain repayment details. Banks and mortgage companies typically enforce promissory notes through foreclosure proceedings while for other promissory notes the harmed party may file in small claims court or superior court to seek justice for damages sustained from breach.
Promissory notes can either be secured with real Estate such as a home, or unprotected with nothing more than the promise of repayment. State usury laws may limit how much interest can be charged so it is wise for the holder to check them first before creating one.
Failed promissory note holders could find themselves facing foreclosure, lawsuits and other actions from holders who will file suit to collect all amounts owed, plus interest. A collection lawyer can assist in the enforcement of promissory notes.
Collateral
Some promissory notes require the borrower to offer up some form of collateral should they fail to meet the terms of their repayment agreement. This might take the form of property such as their home or car, or it could even include rights and interests – something especially crucial when large sums of money are involved.
Persons creating promissory notes should make sure to include all relevant details in their document, at minimum including both parties' full legal names and addresses, the face value of what was borrowed, when its effective date is and any interest rates attached.
Contracts should also set forth when the statute of limitations for debt enforcement will start running, ensuring that creditors have all available legal recourses to recover payments should borrowers fail to honor their commitments.
Enforcement
A promissory note can stand up in court if all essential terms of borrowing and repayment are clearly set out, including amounts borrowed, interest rate, names/addresses of parties involved, any dates included in the agreement, etc. To be legally binding, the document should also be written and signed; additionally, both lender and borrower should maintain copies.
Legal recourse may be available if a borrower breaches the terms of a promissory note, depending on how it was structured. For example, secured promissory notes often contain assets of value that can be taken if debt payments don't clear within an agreed upon timeline.
If someone needs help collecting on an unpaid promissory note, they should reach out to a professional debt collection agency for help in order to collect according to legal standards and comply with their debt collection duties. This will ensure the debt is collected effectively.
Collections
Creditors who wish to recover unpaid funds through debt collection agencies should first follow certain protocols in order to do so effectively. They include sending several written reminders that installment payments have fallen behind, and documenting when and why there has been a default.
When making out a promissory note with assets as collateral, lenders have the option to seize these items should there be any default. This could include tangible personal property such as cars and jewelry as well as intangible personal assets like intellectual property rights, stocks, trademarks or patents.
At times, circumstances outside a person's control can impair their ability to pay their promissory note, such as job loss or divorce. When this occurs, their credit can suffer severely and the holder of their promissory note may need to file in small claims court in order to enforce payment of it.