Enforcing Promissory Notes (What to do when you lend a person money and they don’t repay)

A promissory note is a written agreement or contract between two parties in which the creditor agrees to pay back at determined intervals a sum of money to a lender. Promissory notes include, but are not limited to, money given for student loans, car loans, and personal loans. Promissory notes are either secured or unsecured by collateral. It is preferable for a note to be secured by collateral so that if the creditor does not make timely payments the lender will receive something of value to cover the loan.

If the creditor fails to timely pay under the promissory note, the creditor is in default. The lender has several remedies at this point in time. Although not obligated to do so, the lender may work with the creditor on an extension of time to repay under the loan. The lender could chose to foreclose on the loan, which means that the lender can request that the money be paid back in full right away. Usually, this is accomplished via a phone call and/or sending a demand letter via certified mail.

If the creditor cannot pay, then the lender can repossess the collateral, if any. The lender may do this itself or hire a professional agency to do so. The collateral can be sold to satisfy the loan. If the proceeds of the sale exceed the amount owed, then the remainder is given back to the creditor less any expenses. If the proceeds do not cover the amount owed, then the lender can file a lawsuit for any remaining balance owed plus filing fees, service fees, etc. If the promissory note is not secured by collateral, then the lender may file a lawsuit for breach of contract.

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Once a judgment is entered against the creditor, then the lender may need to expend further avenues if the creditor still fails to pay. For example, the creditor may engage the services of a professional collection agency to enforce collection. The creditor may also seek to garnish the creditor’s wages by initiating a garnishment action. In addition, the creditor may sell the promissory note to an entity that specializes in buying notes and attempting to collect on the debt in that fashion. Finally, the creditor may decide to write off the loan as a loss for tax purposes. Depending on the amount of the debt, the creditor may be required to claim any forgiven debt as income and pay tax on it.

If a lender decides to file a lawsuit to enforce the promissory note, it is wise to consult with an attorney before doing so.

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