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How can we enforce a simple promissory note?

By Dipendra Bhatta, Date published: 2022-09-20

How can we enforce a simple promissory note?
Image by andreas on Freepik

Promissory notes are written promises by a party to pay another party a certain amount of money at a specified time. In the business world, promissory notes act as debt instruments; meaning they are a tool that can be used to raise capital. It generally contains all the terms related to debt such as the interest rate, maturity date, principal amount, and others. It also includes the steps required to fulfill the promise or a repayment schedule as such.

There are three parties to a promissory note, the drawee, drawer, and payee. The lender who has loaned the money is known as a drawer. This person agrees to pay the drawee a certain amount of money when the promissory note matures. The payee or drawee is usually the same person. The drawee is someone in whose favor the note is prepared, and the payee is someone to whom the payment is made. The drawee or payee cancels the promissory note and gives it to the drawer when the amount owed is cleared.

However, each promissory note is unique, and one will always be quite different from another. They will have specified procedures that have to be followed to make the terms of the contract enforceable.

The plan with a promissory note is definitely to get repayment as per the terms of the note. However, if the terms of the note are not met, you can enforce a promissory note as well. You will first have to send a demand letter requesting repayment to the borrower in writing. Often, this is all that is required to get the repayment back. However, you can send notices at specific intervals after the due date. For instance, you can send it on the 30th, 60th, or 90 days after the due date. If you still do not hear back from them after this and when no response to the demand is received, you can use a collection lawyer to file a complaint with the court. Depending on what amount is owed, lawsuits can be filed.

But before moving ahead with this, do have a talk with the borrower to see what their situation is. Ask if they can make partial payments or repay the debt on schedule. If you can accept a partial payment, then you can create a debt settlement agreement with them.

Some other enforcement tools that can be used to collect on a simple promissory note are:

  • Information subpoena; A lender could request an information subpoena. Here a set of written questions is provided, and it can help lenders obtain information about the debtor’s financial situation such as their assets and income.
  • Wage execution or garnishment: This is an order where the debtor’s employer will be directed to deduct a certain amount of money from the debtor’s pay until the lender receives the full payment.
  • Bank levy: This allows a debtor’s bank account and its funds to be frozen by a creditor in order to pay the judgment amount.
  • Seizure of assets: When this is applied for at the court, an order is sent out and it allows for legal representatives to enter the debtor’s property and seize some assets. These are particular and specific assets that are then sold at a public sale.

Enforcing Simple vs demand promissory notes

In a simple promissory note, the full amount is usually due on a specific date, and there is no payment schedule here. Depending on what was agreed upon earlier, an interest rate could or could not be applicable. Enforcing these notes means the full amount will be expected at once.

On the other hand, a demand promissory note is one where the lender asks for the amount back at any time, they want by giving a reasonable notice period.

Conclusion

Promissory notes are legally binding and so when someone defaults on the promissory note, you can legally claim and possess the individual’s property as collateral. Lenders can seek legal restitution via court, but it is better to settle things more amicable than to take them to court. But for situations where it is needed, there are many ways to enforce a promissory note and ensure that lenders get the amount back legally.

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