Providing a loan is never without risk, which is why promissory notes are so important for lenders.
Though promissory notes are not as formal as official loan contracts, they should clarify the terms of the loan and the applicable consequences in the event of delayed payment or failure to pay.
They are also legally binding, which is vital when the repayment process doesn’t go as planned.
When a borrower has breached your promissory note and does not agree to a reasonable repayment plan, a lawsuit is sometimes the only way to definitively resolve the issue.
Types of promissory notes
Not all promissory notes are the same. Before you explore your legal options, it is important to take stock of the type of promissory note the borrower signed.
Secured or “collateralized” promissory notes explicitly specify assets that could be used as collateral if the debt isn’t paid according to the terms of the agreement. Anything of potential value can be used as collateral, including business assets, real estate and personal property.
Unsecured promissory notes can be especially challenging to enforce, because they often involve not only a lawsuit, but further post-judgment collections efforts.
Contents of a legally binding promissory note
For a promissory note to be considered legally binding, it must adhere to a number of requirements.
The parties involved in the contract have to be explicitly defined. It is good practice to include the borrower’s and lender’s full name (or business name) and address.
Defining the parties is important in disputes involving business loans, because in the event of default, it enables the lender to determine who, specifically, is responsible for repayment and any collateral.
Promissory notes should also contain “consideration of” clauses, which specify the interest terms to which the lender is entitled. These clauses typically include a very specific timeline regarding any accrual of interest.
Generally, as long as the promissory note contains legally acceptable interest rates, the signatures of the two contracted parties, and are within the applicable Statute of Limitations, they can be upheld in a court of law.
Conduct requirements for lenders
Should your loan dispute lead to litigation of any kind, you’ll want to ensure that you, as the lender, have not violated Federal Fair Lending Regulations, including the Equal Credit Opportunity Act (ECOA.)
Your promissory note may entitle you to repayment, but borrowers also have rights protected by law.
Primarily, it is not legal to harass borrowers with aggressive tactics such as excessive phone calls and home visits. Even though litigation may be inevitable, unsubstantiated legal threats are not permitted.
How to get started
If you are owed money under a promissory note that has not been repaid in full, it may be necessary to file a breach of contract lawsuit.
To prepare to file suit, you should gather the original promissory note, as well as any formal or informal records of your correspondence with the borrower that are related to the collection of the debt.
To learn more about how to recover your loan when a promissory note is breached, contact a Business Trial Group attorney today for no cost and with no obligation.
