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Making sure a promissory note is legally sound

On Behalf of | Feb 23, 2024 | Creditors' Rights

With a promissory note, you can loan money with a signed agreement that obligates the party to pay it back. Still, there is the chance that litigation could erupt if the debtor contests some of the note terms or even the validity of the note itself.

As a creditor, you want to ensure that your promissory note can stand up to legal challenges, both to protect your rights and increase your chances of collecting the debt if the debtor fails to make payments.

Include all relevant information

Any missing information could prove fatal to the enforcement of your note. Therefore, the document should identify the parties involved in the transaction, while also including clarifying information such as the legal names, addresses and contact information of both the creditor and the debtor.

The note must also describe the terms of the agreement, such as the amount of money borrowed, the interest rate and the repayment schedule. Further information includes the total amount the debt owes, including the principal, interest, penalties for late payments and any other applicable fees.

Also, a promissory note should not have ambiguous language. The document should be clear in laying out the obligations of both parties without room to interpret terms in different ways.

Enhance authenticity

Both parties must sign the promissory note to make it legally binding. However, even a signed document can face a legal challenge. Consider having the signatures notarized or witnessed to add an extra layer of legality.

In addition, keep accurate records of all payments made by the debtor, as well as any communication related to the promissory note. If the debtor contests the validity of the note or claims to have made payments that you did not verify, you can use these records as evidence to support your case.

Avoid alterations

Once you and your debtor have signed the promissory note, avoid making any alterations to the document without the consent of the debtor. Unauthorized changes can void the agreement and make it unenforceable.

Conflicts over financial agreements can take many forms. Going over a promissory note for any defects may prevent any significant legal challenges from arising.