You’ve likely either had to lend or borrow money from someone once or twice. In many cases, these loans were informal arrangements between people you know, such as friends or family members. But in other cases, there were more formal agreements between you and financial institutions such as banks or credit unions. These loans can be established by a promissory note stating the borrower’s promise to repay the lender.
A promissory note is a document that details a loan made between a lender (payee/promissee) and a borrower (payor/maker/issuer). Promissory notes contain the sum of money borrowed and the date the borrower will pay the money back. Sometimes, a promissory note is referred to as a note payable or even a note.
While there are several types of promissory notes, they are often short and simple documents. But what happens when the validity of such a note comes into question? Let’s delve deeper into the elements that can void a promissory note, providing a clearer picture of its implications in your financial journey.
What Can Void a Promissory Note?
1. Incomplete Signatures
- Incomplete signatures on a promissory note can undermine its validity and enforceability.
- Failing to sign a promissory note properly can suggest a lack of intent or agreement by the involved parties.
2. Unfair Terms
- A promissory note containing unfair or unconscionable terms may be deemed invalid.
- Excessive interest rates, unreasonable penalties, or provisions that disadvantage one party can render the note unenforceable.
3. Unclear Clauses
- A promissory note should have unambiguous terms and conditions.
- Clauses unclear or subject to interpretation can lead to disputes and invalidate the note.
4. Lost Original Copy
- Losing or misplacing the original promissory note can complicate its enforceability.
- In the absence of the original note, proving its existence or terms can become challenging and potentially invalidate the note.
5. Missing Payment Amount
- The absence or omission of the payment amount in a promissory note can create uncertainty and affect its enforceability.
- Clearly stating the principal amount and repayment terms is crucial for maintaining the note’s validity.
6. Missing Interest Rate
- Promissory notes that fail to specify the interest rate (if applicable) can face enforceability issues.
- Clearly stating the interest rate is essential for the note’s validity and the creditor’s rights.
7. Past the Statute of Limitations
- Promissory notes are subject to a statute of limitations, which imposes a time limit for legal actions.
- If the note exceeds the statute of limitations, the creditor may lose the ability to enforce the debt, rendering the note unenforceable.
8. Changes Made without a New Agreement
- Modifying a promissory note without all parties’ consent can void the note.
- Proper documentation and agreement through a new contract or amendment are necessary to maintain the note’s validity.
What Happens When a Promissory Note Becomes Invalid?
When a promissory note becomes invalid, the note is no longer legally binding and cannot be enforced. It can impose severe consequences on both the lender and the borrower.
- The borrower is no longer legally obligated to repay the amount specified in the note, so the lender may be unable to enforce the repayment of the debt.
- The lender may lose the legal remedies typically associated with enforcing a valid note.
- Disagreements between the borrower and lender could result in legal proceedings if the parties cannot resolve through negotiation or alternative dispute resolution methods.
It’s important to note that the specific consequences can vary depending on the jurisdiction and the individual circumstances involved. While it doesn’t mean the debt is canceled altogether, the lender will have a more challenging time collecting the debt — even with legal advice from a qualified attorney or a collection agency.
What to Consider Before Signing a Promissory Note
A signed promissory note outlines the transaction’s terms and conditions, so all parties can ensure that their deal and intentions are entirely recorded.
Review the promissory note carefully before you sign it or exchange any money. You should consult a lawyer for substantial sums or complex details.