One of the most frequent issues people face is recovering money they are owed from others. However, there are a few things someone can do before lending money to make collecting a debt less of a headache. A very important and easy thing to do is to create a promissory note to memorialize the important terms such as how much money is being loaned, when the borrower is expected to begin making payments, in what partial amount or “schedule” of amortization of the loan and the interest rate to be applied.

Promissory Notes

A promissory note is a contract that evidences a debt. A promissory note outlines the terms by which the debtor will pay the lender. Promissory notes can be a useful tool for someone who wants to increase the likelihood they are paid back money they loan to others.

A properly written promissory note is clear evidence of a debt and its terms, which makes it easier to collect a debt through a judicial proceeding.

Collection of Attorney’s Fees & Costs by Written Agreement

People who are owed money can be faced with the tough decision to spend money on legal fees to try to collect the debt, or just cut their losses. Unfortunately, the costs involved with pursuing the debt make pursuing the debt a less attractive option.

An attorney’s fees and cost provision, which awards the prevailing party their attorneys’ fees and costs incurred after any action taken to collect a judgment from the debtor, is not automatic but can be negotiated into a promissory note. It allows the parties to contractually agree to have the losing party pay the prevailing party’s legal fees in the event of a dispute. Adding an attorneys’ fees and costs provision in a promissory note can be useful to avoid the financial burden associated with collecting a debt. The prevailing party in a judicial proceeding is entitled to attorney fees in a breach of contract action if the contract includes a fee agreement.

Including a fee agreement provision in a promissory note allows someone to pursue the money owed to them without worrying about the financial burden of doing so, while providing an incentive to the other party not to default on their payments or to make other arrangements such as an extension of the debt by amendment.

Why do I need an attorney to review my contract?

It is always a good idea to have an attorney look over any contract you plan to enter into. Written contract terms limit the chance of a contract dispute arising down the road. Also, an attorney knows what language to include in your contract that will benefit you. Interest cannot exceed 10% per annum; simple interest or usury laws will apply unless a usury savings clause is written into the promissory note that limits interest to the maximum legally allowable interest rate. However, the best practice is to cap interest at 10% per annum.

Statute of Limitations Concerns

You also need to consider the statute of limitations, which can serve as a time bar to collecting on an agreement. For example, the statute of limitations in the State of California is four years from the date of the breach, which is usually the first day the party failed to pay after the entire loan or partial repayments came due per an agreed-upon schedule.

Application of State Law and Jurisdiction

If you are loaning money to a borrower out of state, you need to clarify where any dispute will be heard (e.g., the courts of the State of California) and have the borrower agree that they will not contest the court’s jurisdiction against them in the State of California.

Loans to business entities

Sometimes individuals loan money to a business, especially small businesses. The parties need to understand whether that is a true loan. If it is, the lender almost certainly needs to have the business personally guarantee the loan so that it cannot simply walk away from the debt.

Convertible Promissory Note

A convertible promissory note allows a lender to convert a loan into equity in a small business under certain conditions. It can be optional, allowing the lender to demand repayment of the loan or to exercise the option to convert the loan into equity in the company when certain conditions outlined in a convertible promissory note are established.

Are you looking for help developing a contract agreement, or need a lawyer to review your existing contract? Contact the leading San Diego business & contract law attorneys today at Gallagher Krich, APC!

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