A personal promissory note is a written document that evidences a loan of money to a family member or friend. While promissory notes generally come into play during a business transaction, like the purchase of real estate, it is also important to protect yourself when a loan is made to a family or friend.
The promissory note will serve as evidence that someone promised to pay you money back at a future date. You should include the terms of the loan in the promissory note and understand your legal rights surrounding the note.
What Needs to Be Included on a Personal Promissory Note?
In order for the personal promissory note to be valid and binding, several things should be included. First, the note should clearly identify the parties to the loan by their legal names. All parties must sign the note to make it binding.
The amount of money loaned, repayment terms, date the loan was made, and end date should also be included. Some things to consider are whether you want interval payments (promise to pay a set amount every month) or an end date (promise to pay the loan off entirely by a certain date). These are just some examples of repayment options and other arrangements would also be acceptable.
Another thing that you will need to decide is whether you are charging interest on the loan. This can be a difficult subject to bridge, as many people will not want to charge interest to a family or friend. If you do decide to charge interest on the note, then interest rate must be clearly articulated in the note. However, keep in mind that interest is not required for a valid promissory note.
If there is no interest on the loan, then it still may be put onto it for tax purposes. This means you will have to report the projected interest as income, even though it was not charged or collected. However, most of the time you can bypass this by reporting it as a gift, which would be considered tax-free. A tax lawyer or other tax professional can advise you on how to handle this.
Keep in mind that the majority of loans made to family and friends are unsecured, meaning that they will not identify collateral for you to take if the borrower fails to repay the money. However, if you are securing the loan then make sure to include this in the personal promissory note.
Your state may also have specific requirements for what needs to be included in a personal promissory note. Make sure to familiarize yourself with this before drafting the note.
Can I Sell a Personal Promissory Note?
One common question is whether you are able to sell personal promissory notes to third-parties to collect upon the debt. This happens often with promissory notes that are not personal-based, especially with mortgages.
Generally, most people will not sell personal promissory notes because that could create more tension between family and friends. However, if you are dealing with nonpayment and the relationship is strained, then you may want to look into your options for selling the debt to a third-party. Just remember that your cut of the debt will be lower if collected because the third-party will take a fee.
How Long is a Personal Promissory Note Valid?
It is also important to know the validity time frame of a personal promissory note. Once the repayment time passes, you will have enforcement options. If the borrower fails to pay what they owe on the personal promissory note and you want to sue, then you will have a time limit to take legal action.
Your state’s statute of limitation law for promissory note enforcement will govern how long you have to bring a lawsuit. For example, California has a four year statute of limitation for debt collection on a promissory note.
Just like any contract, you can include additional terms. So, there could be a term stating that if the note is not paid in a certain amount of years then it would be void. However, if you are the person loaning the money then this would not be a very favorable term to include.
As noted, if the other party fails to fulfill the terms of the loan, then you can bring a lawsuit to collect any outstanding debt. However, when dealing with a loan made to a family or friend you will likely first want to try and reach an out of court resolution. Any amendment to the personal promissory note’s terms, like a repayment extension, should be documented in writing.
Where Can I Find a Sample of a Promissory Note?
There are some templates for promissory notes online that you can find online to help guide you with the process. However, it is still smart to contact a lawyer to help you prepare a personal promissory note, even if you already used an online template. A lawyer can prepare and/or review the note to ensure that all state law requirements are included. This will help with enforceability if there are any issues down the road.
You do not want anything so important and worth that much money to be dependent on a downloaded template. Especially because each state can have unique requirements for a valid promissory note and missing one aspect of the note can be the difference between it being authentic and worthless.
Do I Need a Lawyer If I Have an Issue with a Personal Promissory Note?
If you have an issue with a personal promissory note being unpaid and cannot come to an alternate agreement with your friend or family member that borrowed the money, legal intervention may be the only option. A local contract lawyer can help you attempt debt collection and file a lawsuit, if necessary.
A lawyer can also review the promissory note to make sure it is enforceable and confirm that there was in fact a breach. However, oftentimes debt collection can be done without legal intervention if you have a cooperative relationship with your borrower.