How to Enforce a Promissory Note

What Is a Promissory Note?

A promissory note or promissory letter is a legal instrument that details a contractual agreement between two parties. When the parties are in agreement and sign the promissory note, it becomes a legally binding instrument that obligates both parties to perform according to their agreement.

A promissory note is a flexible document that can be a simple and straightforward representation of an agreement, or it can be a complex and detailed document that covers multiple issues involved with a contractual arrangement. Whatever the scope of the promissory note, the basic tenet is that once it is signed by the involved parties, it becomes a legal instrument that can be enforced via legal remedy if one of the parties does not uphold their end of the bargain.

Breach of a Promissory Note

If there should be a breach of the terms of a promissory note, there are legal remedies available to help enforce the original conditions of the contract. A great deal of how a legal promissory note is enforced can depend on the type of note that it is. Collateralized promissory notes are secured by a piece of property or other tangible asset that can be repossessed if the borrower defaults on the terms of the promissory note.

Many times the collateral that is being placed for consideration is the same item that the borrowed money was used to purchase. However, it is also common for unrelated property or assets to be used to secure a loan through a promissory note, so the security to the note does not necessarily have to be something the loaned money is used to purchase.

The non-collateral promissory note is an unsecured loan that does not use any property or assets to secure the repayment of the note. These types of promissory notes are often used between friends and family members where the worry of breaching the terms of a note with a family member or acquaintance are usually sufficient to ensure repayment. However, this is not always the case, and when a breach does occur, the remedies to enforce repayment of the promissory note are less forceful than having the ability to simply repossess the secured assets.

Enforcing a Promissory Note

Enforcing a secured promissory note is simply a matter of either repossessing the secured asset through your own efforts, or hiring a professional agency to accomplish the task on your behalf. These agencies will charge a set fee for their services, but they usually have a very high rate of success.

The enforcement of an unsecured promissory note is more problematic because there is nothing more than a promise to pay to begin with. The unsecured promissory note form does not promise to turn over any assets to the lender if there is a default, so the lender is left to pursue other avenues to seek remedy for the breach of contract.

The first step in enforcing an unsecured promissory note is to file a petition with the courts and get a judgment in your favor. Although this is a powerful legal enforcement of your rights under the promissory note, it does not in and of itself guarantee repayment of the note.

There is the possibility that the threat of legal action is enough to make the borrower fulfill the terms of the agreement, but if not, then you must move on to the next step. Entering into collections proceedings against a family member or a friend is not a pleasant prospect, so if you are determined to enforce your rights under the promissory note, it can be a good idea to enlist the services of a professional collection agency.

It is important to understand that since the legal promissory note is a legally binding instrument, it falls under the scrutiny of the Fair Credit Lending Act. This gives the borrower certain rights that you must be extremely careful not to violate, or the legal tables could be turned upon you. A professional collection agency must keep up to date with the changing laws regarding collection practices so it is best to utilize one instead of attempting to enforce collection yourself.

While collection agencies can be effective in mitigating your losses from a breach of promissory note, they are not always successful in their pursuit. When this occurs, your options become more limited. After you have received judgment in a court of law, you can seek to garnish the individual’s wages. If you can attach wages, the court will require the employer to automatically deduct a portion of the individual's paycheck each period and send you the money.

If you do not want to go this route and you have exhausted all the remedies available to you, there is the final option of selling the promissory note to an entity that specializes in buying notes and attempting to collect on the debt. This is the last step because it offers the least return on your financial outlay. Note that buyers pay out much less than the face value of the note to the holder because they attempt to collect an amount lower than the original total owed on the promissory note, thereby making it attractive to the borrower.

Lending Money to Family and Friends

Choosing to lend money to an individual or family member can be a very noble endeavor that winds up helping someone and can possibly generate a small profit for you at the same time. Unfortunately, lending money to people is never without certain pitfalls. The best way to protect yourself when loaning money is to form a promissory note that is legally binding so you have a means to collect your investment if there should be a breach in the terms of the note.

It is always advantageous to have some sort of property or assets assigned to the note to act as security in the event the borrower does not honor the terms of the agreement. But if this is not possible and you still want to loan the money, understand that you are not helpless should the borrower become unable to fulfill their responsibilities under the terms of the note. There are specific legal remedies and steps that can be taken to recoup your losses in such a case, but the most important thing is to ensure that you use an up-to-date and legally admissible promissory note to guarantee the terms of the contract.

How to Create a Promissory Note

Use our customizable promissory note template to create a promissory note in just minutes online.