A promissory note establishes a contractual obligation for one party to repay another and sets forth the payment terms and rights upon default. As its name implies, it is a promise made by one party to pay another. A note can be used to document the terms of a loan or a debt repayment. Our clients often use promissory notes secured by confessions of judgment to resolve past due accounts either before a lawsuit is filed or to settle a case after it is filed.
To be effective, a promissory note requires certain terms and provisions. Which terms are necessary depends on the circumstances. For example, if the note is secured by collateral, it must make reference to the collateral. If the note covers future advances, then that needs to be made clear in the text of the note. The note always should set forth, at a minimum, the parties, the amount owed, the payment terms, the interest rate, and the creditor’s remedies upon default.
Promissory notes can operate as security agreements if the right provisions are included. It is best to secure the note with something, such as a confession of judgment, a deed of trust on real property, a lien on a vehicle, or other collateral. The purpose of securing the note is so that the creditor obtains an enforceable interest in an asset that can be repossessed or foreclosed, or in the case of a confession of judgment, a creditor can obtain judgment without having to go through litigation. The note should specifically identify the collateral securing it
Only the debtor needs to sign the note and it is recommended that the signature be notarized. Notarization protects against claims of forgery and against claims that the document is not authentic.
As with any legal document or contract, it is best to have a licensed attorney prepare or review a promissory note prior to having it executed. If you have any questions about any aspect of collecting a debt, drafting a promissory note, or determining how to obtain security for a loan or a debt, please feel free to contact Vann Attorneys.