Do Promissory Notes Hold up in Court?
Do promissory notes hold up in court? They do if the terms of borrowing and repayment are properly stated and signed by the borrower.3 min read
Do promissory notes hold up in court? They do if the terms of borrowing and repayment are properly stated and signed by the borrower. Promissory notes are used as financial tools to document the terms of borrowing and lending money.
Features of a Promissory Note
Promissory notes state the amount of money borrowed, the name of the borrower, the name of the lender, the addresses of the parties, and so on. The lender may file a civil lawsuit to get the money back if the borrower fails to pay it back when due in accordance with the terms of the note.
A promissory note includes the following features:
- Date of borrowing
- Agreed date of repayment
- Interest rate (if any)
- Method of repayment
- Recipient of repayment
- The signature of the borrower
After the note is signed by the borrower, it's kept by the lender as proof of the terms of the loan. The borrower is usually given a copy.
Types of Promissory Notes
Though certain elements are common to all promissory notes, there are different kinds of promissory notes. They are categorized by the type of loan or the reason for the loan. But all promissory notes, no matter what kind, are legally binding contracts.
The most common types of promissory notes are:
- Personal promissory notes
- Commercial promissory notes
- Real estate promissory notes
- Investment promissory notes
Personal Promissory Notes
This kind of promissory note is used to keep a personal record of loan(s) made between two entities. Though it can be uncomfortable to use legal documents when making transactions with family and friends, it's a good practice to do so in order to prevent confusion and strained relationships down the road. A personal promissory note indicates that the borrower intends to pay back the money, and it gives the lender a sense of security.
Commercial Promissory Notes
Commercial promissory notes are normally used by commercial lenders. This kind of promissory note is usually stricter than a personal promissory note. If the borrower fails to pay back as agreed, the commercial lender has the right to demand immediate payment of the total amount of money loaned. In certain cases, the commercial lender can legally hold on to the borrower's property until full repayment is made.
Real Estate Promissory Notes
A real estate promissory note is like a commercial one because it usually involves the seizure of the borrower's property, such as their home or some other valuable, until it's paid back in full. Also, with a real estate promissory note, a default can become public record.
Investment Promissory Notes
An investment promissory note usually applies to a business deal. Such notes are exchanged to fund a business. Typically, they contain clauses that state expected returns on investments for specific time frames.
“Pay to the order of” is an expression that is sometimes used in promissory notes. It means that the borrower pledges to pay to the order of the lender.
In other words, the borrower who signs the note, also referred to as the "maker," is accepting the responsibility of repaying the borrowed amount to the lender or whomever the lender specifies as the recipient of the repayment. This means that the borrower can be ordered to pay the lender's spouse, sibling, friend, or even someone to whom the lender owes money.
How to Sign a Promissory Note
How a promissory note should be signed is determined by state law, which varies. In some states, promissory notes must be witnessed, while in other states, that is not required. Some states require that promissory notes be notarized, while others do not.
Promissory Notes, Mortgages, and Foreclosures
Sometimes promissory notes are used when applying for loans to purchase real property. In such cases, the lending entity usually documents an arrangement to legally take over the property of the borrower if the borrower fails to pay back the loan in full when due. This kind of arrangement is known as a mortgage.
If the borrower defaults, the mortgage-holding entity can take a legal action to sell the borrower's property and pay for the loan with the proceeds of the sale. The above-described legal process is called a foreclosure.
Failure to pay back a loan as agreed by both lender and borrower can be remedied by a civil case heard in a civil court. However, if the borrower provides false information on the promissory note or when applying for the loan, that qualifies for fraud, which is a criminal offense.
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