Promissory notes can be helpful in so many different situations, but what exactly are they and what do you need to look our for when dealing with them? In it’s simplest terms, a promissory note is an IOU. It includes the terms of the agreement, specifically the amount owed, how and when it is to be repaid, and default terms. If you’ve ever taken out any kind of loan, then you’ve most certainly entered into one. Promissory notes are so important to formalize any situation where money is to be repaid at a later date as it creates a record of that transaction and makes it legally enforceable.
Ensure it fits your needs
In order to make sure the promissory note fits your needs, it is important to detail exactly how and when payments are to be made on the note. Promissory notes can include a payment to be made in a single lump sum, can be spread out over a long or short period of time, or the mixture of both, or a demand promissory note where the amount is due when demanded by the note holder. Once the payment terms are agreed-upon by the parties and that agreement is reflected in the note, another issue is whether there is any collateral. Collateral would be typical for situation where the note is used to secure the purchase of a hard asset like a car or a home. It would allow the note holder to legally regain control of the collateral should you default under the note.
Consider the terms
Finally, default terms are an important consideration. There should always be a notice period and a period in which the default can be cured. Then, if the default is not cured during that period, collection on the note can begin. This will typically require the filing of a lawsuit for breach of contract, specifically, the breach of the promissory note. The note can also include the recovery of attorney fees and costs should the holder be forced to enforce the note. Unless there is an agreement between the parties, a lawsuit would be required to regain control of any collateral that was used to secure the note.
It’s important to have a good promissory note any time you are agreeing to repay or be repaid moneys to make sure your rights are protected, and if you are the holder of the note, to make sure you have the proper legal avenue should there be a default.
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