The issue of enforcing a secured or an unsecured Promissory Note usually arises from the inability for a borrower to repay a lender within a specific timeline or by the maturity date of a loan. Enforcing a promissory note can be a challenging and lengthy process, so read ahead and discover steps you can take to resolve your debts appropriately.
Enforcing a Secured Promissory Note
A secured Promissory Note gives the borrower the ability to obtain security interest, also know as collateral, secured assets or secured property that seeks to guarantee payment. In this instance, if the they can’t make the repayments the lender is able to repossess the assets included in the Promissory Note.
In other words, if the person who owes you money does not pay, you have the legal right to take their property as collateral.
Types of Property that can be used as collateral
- Tangible personal property: Jewellery, cars, computers and computer software, stereos, DVD’s and televisions.
- Intangible personal property: Right to business, stocks, copyrights, trademarks and patents.
Enforcing an Unsecured Promissory Note
An unsecured Promissory Note can often be more risky for a lender to adopt because the lender has no collateral to recover should the borrower default or go bankrupt. Although the lender is entering into a more risky environment, it is often considered a favorable situation as they can set higher interest rates due to the associated risks.
Enforcing unsecured Promissory Notes can be a tedious experience involving a great deal of time, money and effort. Not to mention the emotional strain of taking a friend or relative to court.
If you have decided to enforce the unsecured Promissory Note, here are some steps you will need to take to recover the debt.
Speak to them in person
You should arrange to meet the person using some form of traceable contact such as emails or chat applications. Doing this in person helps to create a dialogue between both parties about how the debt can be repaid.
You may like to remind them that you will be taking the process further and the enlisting a debt collector or arbitrator if they don’t repay you. This may have a negative impact on their credit ratings and in turn affect their chances of loaning money in the future. Openly communicating about the debt prior to informing them in writing might actually spring them into action!
If they are a close friend or family member, it might be helpful to direct them towards a credit counselor if they are not coping with their debts.
Draft a Demand / Notice Letter
If having a conversation about the loan doesn’t result in repayments, you may need to resort to written warnings. The following two letters give the borrower a little more time to repay the amount owed, while providing them with a clear written warning about the actions you will be taking to enforce the terms outlined in the promissory note.
The Notice Letter must include:
- The name of the borrower
- The date of the Promissory Note
- The amount owed
- The payment date/s or installment amounts
You must also include a few sentences regarding the nature of the demand in the letter; for example; “If the amount owed is not paid by the date specified, I will be taking legal action to recover the amount owed.”
Although this seems a little dramatic, it’s important to note that this letter and the follow up letter below aim to save both parties from the cost and time it takes for debt collection services to get involved or if the matter ends up in court.
Write and send a Follow Up Letter
If there is no response from the borrower after sending the Notice Letter, you should attempt to send a Follow Up Letter.
The Follow Up Letter should include;
- The date and nature of the previous Notice letter sent
- Reinforcement of the details included in the last letter
- Restatement of steps that will be taken should the borrower fail to make payments to repay the loan (see above point II)
Enlisting a Professional Collection Agency
Be sure to do some research and compare prices to find the best deal possible. Keep in mind that professionalism and credibility are important factors to consider when making your choice. Many collection agencies won’t charge you unless they are able to collect the funds, so finding the right agency is critical. Don’t forget that once you have enlisted a collection agency, there is still no guarantee they will be able to recover the funds.
There are a range of agencies that have been banned by the Federal Trade Commission from participating in debt collection activities for various illegal reasons. Before you enlist an agency, make sure they are operating legitimately and are working within the statute of the Fair Debt Collection Practice Act. Be certain they are not giving false or misleading information, using unfair or abusing means to collect debt or being deceptive in any way. For more information, read this article on how to spot a fake debt collector.
Filing a petition or complaint in court
If the efforts of the collection agency were ineffective, you may need to file a petition or complaint in court. Depending on the amount owed and circumstances of the debt, the petition will most likely need to be filed at the Civil Courts in their district. The case will be filed as ‘limited’ (usually less than $25,000), ‘unlimited’ (greater than $25,000) or a ‘small claims’ case depending on the amount owed and the state the case is filed. In most cases, the petition for the enforcement of a Promissory Note will require the signature of an attorney.
How to File a Petition in Court
The petition needs to be filed in the district court where the defendant (borrower) lives. It is often filed under a breach of contract. Each state and circumstances will differ in the application process for filing a petition of this nature.
In California for example, a breach of contract requires the following factual elements to be presented to recover damages from the borrower:
- That both parties have entered into a contract.
- That the lender did everything that was required by the contract.
- That all the conditions the borrower needed to meet were stipulated in the contract.
- That the borrower failed to do something that the contract required (for example, not pay the installments or money owed) or the borrower did something the contract prohibited (e.g. went on a holiday and did not pay the amount owed).
- That you, the lender, were harmed by that failure, therefore breaching the contract.
If you are unsure of the evidence you will need to gather, here are some tips written by the California Judicial Branch on how to gather evidence when going to court.
When going to court
Now that you are at the stage of mediation, you have arrived at another point at which you should stop and think about the relationship and the money. Since both parties have all the facts and evidence required, you both have this final opportunity to try and come to some sort of a compromise by settling the case before it goes to trial.
Settling the case outside of court will be a lot cheaper and less time consuming than taking it to trial. Think about what your goals are and whether gaining the money back balances out the time and cost it will take if you do not try to settle or mediate it before taking it to trial.
Don’t forget that if you do go to court, the judge may not rule in your favor so think about it carefully. Before you continue, call your local clerk at the civil court in your district to ask about the specific rules for filing and what you will need to include in your lawsuit.
Once you have gone to trial and a judgement is made, if the court has ruled in your favor a local sheriff may enforce the ruling by visiting the borrower in person and serving them the court ruling. However, even though the court has ruled in your favor it is still possible you may not recover the amount in full especially due to the cost of taking it to trial.
The court may also make the judgement that if the borrower cannot pay the amount owed, their salary will be garnished and their employer will deduct the amount owed either in installments or upfront.
As a lender (creditor), you may be entitled to recovering some of the costs associated with filing the lawsuit. Decided by the courts, these may be included in ‘damages’ repaid including interest, attorney fees and court costs. Additionally, if you are thinking about representing yourself in court read this article to ensure you’re well prepared to achieve the best possible result.
Selling the Promissory Note
If you’ve exhausted all other options and are still not able to retrieve the debt, you may need to sell the Promissory Note to a vendor. Keep in mind that you will not get the full value of the note (usually around 60-90% of the value), so this really is your last option. It’s important to remember that should you choose to sell the note, your loss will be significant as vendors that buy these promissory notes often purchase them at a great deal less than the value of the loan, leaving you with very little at the end of the process.
To sell the note, contact various buyers and try to find the best deal. You can always negotiate on price, just like any other sale of a product or service. However, be careful! Ensure you are selling the note to an established company that has the knowledge and capability to handle the sale of your note.
- Be proactive, firm yet reasonable when dealing with the borrower
- Always maintain a paper trail of all conversations and payments
- Do your research and be careful when dealing with debt collection agencies
- Check with your local small claims or civil courts about documents needed
Enforcing a Promissory Note can be a challenging process, especially when dealing with a friend or family member. It is strongly advised that you start by communicating with them to try and avoid the time and cost incurred when hiring debt collection agencies or taking them to court. If you are still trying to negotiate with the friend and family member about repaying their loan and have not reached the stages above, read our article on steps you can take to legally get your money back from a friend.