I loaned some money to a friend, and he signed a promissory note. What should I do?
How to Collect on a Promissory Note
When a debtor doesn’t pay up, you need to take action. You might send a demand letter to the debtor, sue in court, or hire a collection agency. Consider each option carefully. You might need a lawyer’s help, which you can find by getting a referral from your nearest bar association.
Working with the Debtor
Calculate how much the debtor owes.The debtor may owe interest, fees, and penalties. Look at your promissory note to see what late charges you can assess. Then add up the total amount the debtor owes.
Avoid harassing phone calls.Federal and state laws prohibit debt collectors from engaging in aggressive collection practices. You can avoid the problem by not making any phone calls. Instead, communicate with the debtor in writing.
- Illegal collection practices include using obscene or profane language, threatening to arrest debtors, and calling at inconvenient times.
Send notification letters.Send the first letter as soon as the debtor is 30 days late. Remind them they are late and tell them how much they need to pay to get current on the loan. Also include information about the date of the promissory note and the date payment was due. You can also send 60-day and 90-day past due letters if you want.
- Remind the debtor that you will pursue other remedies as spelled out in the promissory note if they don’t pay you back in time.
- Send the notification certified mail, return receipt requested and keep the receipt with your copy of the letter.
Write a demand letter.The debtor might ignore your late-payment notices. In that case, you need to send a demand letter. Review your promissory note to see what actions you can take. For example, your promissory note might allow you to accelerate payment, meaning the debtor must pay the entire amount owed.
- Format your demand letter like a business letter, and use letterhead if you have it.
- Include a brief description of the dispute. Mention dates: the date of the promissory note, the date payment was due, the date you sent notifications, etc. If you go to court, a judge will find this background information helpful.
- State what you want the debtor to do. If you want the entire debt paid off, then include a deadline.
- Remind the debtor you will sue in court if they don’t meet your demands.
Talk with the debtor about repayment options.After receiving your demand letter, the debtor might call, panicked. Discuss why the debtor has been late and when they might catch up.
- You can choose to let them skip a few payments if that will help them get current on the loan.
- Alternately, you might want to play hardball and not let them miss a payment.
Seize collateral, if possible.The debtor might have pledged property to back up the loan. In that situation, you can seize the collateral.You should have a signed security agreement that identifies the collateral and where it is located.
- When seizing collateral, you can’t breach the peace. This means you can’t trespass on the debtor’s property or trick the debtor by pretending to be a police officer.
- Sue in court if you can’t reach the collateral.
Settle for less than the full amount.The debtor might have no money, and if they declare bankruptcy you'll probably be completely wiped out.In that situation, you should consider settling the debt for less than the full amount.
- You might have to negotiate. The debtor will want to pay as little as possible, but try to get them to pay at least 50% of what they owe. Demand a lump sum payment in cash.
- Feel out how financially stable the debtor is. Do they have a job? Do they have other debt payments, such as car payments?
Suing the Debtor
Find the correct court to sue in.You can’t sue the debtor in just any court. However, you have options, depending on the circumstances. Consider the following:
- Consider small claims court if you're suing for a small amount. Each state has a small claims court that hears cases up to a certain dollar amount. Small claims court is ideal if you don’t have an attorney.
- You can generally sue in the county or district where you made the contract or where the debtor lives or works.
- If you live in a different state than the debtor, you might file in federal court. However, federal court lawsuits are complicated and you’re better off if you have a lawyer.
File a complaint.You kick off a lawsuit by filing a complaint in court. In this document, you identify the parties to the lawsuit, how much you are suing for, and why you are suing. You should also attach a copy of your promissory note. File your complaint with the court clerk and pay a filing fee.
- Most small claims courts have “fill in the blank” forms you can use.
- If no form is available, look online for sample complaints or consult with an attorney who can help you.
Send the debtor notice of the lawsuit.Typically, you’ll send a copy of the complaint and a summons, which you can get from the court clerk. You’ll need to follow your state’s rules regarding service. Generally, you can use the following methods:
- Have someone hand deliver the papers to the debtor. You can’t deliver them yourself, but you can ask a friend or hire a process server. If the debtor is a business, you will serve their registered agent.
- Pay the sheriff to make service, which is an option in some counties.
- Mail the papers to the debtor using first-class mail.
Receive the debtor’s answer.The debtor has a chance to respond by filing an answer and sending you a copy. Read it closely because it will contain the debtor’s defenses. For example, the debtor might argue the promissory note isn’t valid or that you’ve verbally agreed to let them stop making payment.
- The debtor might also counter-sue you. For example, if you called the debtor in the evenings or threatened them physically, they can sue you for illegal debt collection practices.
Prepare for trial.The trial will revolve around whether the promissory note is valid and whether the defendant is justified in not paying back the debt. Unless you’re in small claims court, you’ll need to do quite a bit of work before your trial date approaches.
- You’ll swap documents in a process called “discovery.”
- You may need to have a settlement conference.Courts hope parties can settle their disputes so a trial becomes unnecessary.
- You can file a motion for summary judgment. In this motion, you argue you should win without going to trial because no set of facts exists that will allow the debtor to prevail.
Go to court.Each side can call witnesses and introduce documents. You’ll want to introduce the promissory note and testify about the debtor’s history of payment.
- Most small claims courts don’t have juries, so a judge will likely decide who wins.
Enforce your judgment.If you win, you get a piece of paper from the court. Now you need to enforce it. The debtor can voluntarily pay you, or you might need to take other action. Consider your options:
- You can garnish the debtor’s wages or bank accounts.
- You might be able to have the sheriff seize and sell personal property such as boats, cars, jewelry, etc. You will get some of the proceeds from the sale.
- You can also put a lien on real estate, such as the debtor’s home. Depending on where you live, you might be able to force a sale of the property. At a minimum, you can receive payment if the debtor sells the house or refinances.
Hiring a Collection Agency
Find a reputable collection agency.You can hire a certified member of the Commercial Collection Agency Association. These agencies have extensive experience and adhere to state and federal collection laws.
- Also check whether anyone has complained to the Better Business Bureau about the collection agency.
Confirm they’re licensed.Collection agencies should be licensed by the state where they are collecting the debt. Ask for the license number and double check by calling the state’s licensing agency.
- States usually require that debt collectors be bonded and have insurance, so ask for proof of that as well.
Check fees.Generally, collection agencies charge contingency fees. This means they only get a fee if they collect money, and they take a percent off the top. Typically, an agency will take 15-20% of the amount collected.Get the fee agreement in writing.
- For example, an agency with a 20% contingency fee keeps ,000 of every ,000 collected.
- Because agencies work on contingency, some debts might be too small for them to take on. Call and check.
Ask how they find debtors.The debtor might have skipped town after stopping payment on your debt. If so, the collection agency should tell you how they will find them. For example, they might employ skip tracing, which involves using special databases to track down the debtor.
Sign a contract.Make sure to get the agreement in writing. Don’t rely on oral agreements, and insist all key terms are included in the contract. If you have a dispute with the collection agency, then the terms of your contract control.
QuestionCan the court garnish a person on disability income to repay a promissory note when the person defaults on the note?wikiHow ContributorCommunity AnswerProbably not, but you should talk to an attorney about it and see if he or she knows something about that.Thanks!
QuestionCan a person who is unable to pay back the money on promissory note be forced to sell his home if that is his only asset?wikiHow ContributorCommunity AnswerThis is complicated and depends on the state where the home is located. For example, most states exempt a certain amount of value in a home. This amount might be enough to cover the entire house. Consult with an attorney to discuss your specific situation.Thanks!
QuestionWhat happens if the borrower is in financial debt and has no funds?wikiHow ContributorCommunity AnswerThey may declare bankruptcy, which will wipe out any unsecured debts.Thanks!
QuestionCan a promissory note be collected if the person who borrowed the money has died?wikiHow ContributorCommunity AnswerA claim must be made against the deceased's estate. Check with an attorney, because strict deadlines apply.Thanks!
QuestionCan I seize someone's property who is refusing to pay their promissory note?wikiHow ContributorCommunity AnswerNo, not unless it is expressly permitted in the promissory note, or you have a court order. Either way, I would consult a lawyer, or go to small claims court before taking any action. Seizing someone's property may cause more harm than good, as you could very well end up being charged with theft.Thanks!
QuestionI have a promissory note with two borrowers. The note states "each principal, jointly and severally, promise to pay." Is it legal for me to only sue one of the borrowers to collect on a default, or does it have to be both parties?wikiHow ContributorCommunity AnswerAs they are severally liable, you can sue just one. I would suggest going after the one that has the ability to pay.Thanks!
I have a promissory note with a collateral clause specifying a vehicle as collateral, can I take possession of the vehicle on default?
Can I change or amend a promissory note to make it secure?
How do you extend the statute of limitations on a promissory note?
Can a Promissory Note be collected if the holder of the note has died?
- Every debt has an expiration date, which is called the statute of limitations. If you want to sue, you must sue before this deadline. Search online to find your state’s statute of limitations or talk to a lawyer.
Video: How to create your own Promissory Notes - Michael Tellinger
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