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10/23/2014 » 10/24/2014
2014 Family Law Seminar

Promissory Notes and Loans
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A promissory note is a written agreement to pay back, at determined intervals in the future, a certain amount of money. The lender, or bearer of the money, is known as the creditor, and the person borrowing the money is known as the debtor.

Whenever money is given as a loan (such as from a bank, for example), a promissory note will be used. A promissory note could be used for money given for student loans (educational loans), car loans, or even personal loans.

Collateral
Collateral is anything that has value and that can be used to secure the note or ensure that, if you do not make the payments, the lender or promissor will get something of value to cover the loan. Usually, banks want the value of the collateral to be at least as much as the loan itself. This protects the lender from defaults (see below) on the loan. Many times, such as if you buy a car for instance, the car itself can be the collateral of the loan. If the money is given for buying a home, the security interest is usually called a mortgage note.

Cosigner
Many times, a bank will ask that someone else come in and sign the note with you. These people are called cosigners, and by signing, they state that they will also be fully responsible for payments made on the loan. This means that if you do not make your payments, the bank has someone else they can look to in getting their money back. Usually, cosigners are necessary for people with bad credit, or for those who do not have much credit established.

Default
Defaulting is failing to make a payment within the specified time, as determined by your repayment schedule. This not only affects your credit rating, but it can cause the lender to foreclose on the loan (also called "calling the note"), which means that the lender can order that the money be paid back in full right away. In other words, defaulting is very bad and is something that you definitely do not want to do.

Missing a Payment
Most importantly, you should tell the lender. Many times, they will give you an extension of time, or maybe even allow you to miss a payment or two. They are not obligated to do so, but being honest and up front with your lender will save you a lot of time and hassle. Remember, they want to help you because they want their money back. Often times, such as in the case of student loans, a forbearance or deferment will be allowed, especially in times of financial hardship. These are grace periods where you do not need to make payments. Watch out, however, because interest usually does accrue during these periods.

Defaulting on a Loan
First, the lender will probably call the note, meaning that the full remainder of the unpaid portion of the loan becomes due. If you cannot pay, the lender may repossess the collateral, meaning they come and take it from you. They will then sell the collateral to get their money back. If the proceeds of the sale exceed the amount owed, the remainder will be given back to you, less any expenses the lender incurred in repossessing. If the proceeds do not cover the amount owed (and most of the time they do not), the lender can bring legal action against you, or any cosigner, for repayment. With a court judgment, they are able to garnish your wages to recover the debt.

Get It in Writing
If you are borrowing money from a family member or friend, or if you are loaning money to a family member or friend, get it in writing. A written document is one of the most important things you can have if there is a problem. The document should state who is loaning the money, who is receiving the money, how much money, and when the money is to be paid back. If interest is also part of the loan, the rate of interest should be noted. The parties involved in the loan should both sign and date the document. For extra protection, you may wish to have the signatures occur before a notary public.

If you end up in court, a written document will be the best evidence to help you with your side of the case. If you make or receive payments on a loan, be sure to keep track of them and document your account with check receipts, bank statements, or even a piece of paper showing the dates and amounts that were paid. If a payment is made in cash, make sure that the lender issues a receipt, preferably signed by the lender, to the borrower. Cash should not leave the borrower’s hand if a receipt is not going to be issued. If the lender refuses to issue a receipt, then the lender should be paid with a money order, cashiers check, check, or any method of payment that can be tracked and documented. When the entire amount of the loan has been paid, the person who borrowed the money should ask for a signed, written release showing that everything has been paid in full. If the terms of the loan change, the parties should put it in writing. BOTH parties should have a copy or original written agreement for their records.


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