The Truth about Security for Promissory Notes

This generally incurs legal costs and court action that oftentimes can last for up to two or three years. On the other hand it can simply involve independent arbitration (if the individual was wise in drafting the Note) which can still require up to three to six months and sometimes more. A wiser, faster, safer and much surer method to guarantee collection of the judgment against those who breached their moral and legal duty to pay the note is... to have an asset pledged in security of the Note in the first place. Typically personal assets pledged are usually in the form of real estate property (such as: Deeds of Trust or Mortgages) or any personal property of significant value. (see UCC-1 Financing documents).

These types of security allows the creditor to legally seize the secured assets much more quickly than say a court of law or arbitration proceedings. In addition, the creditor can avoid to some extent the emotional cost and financial danger of bankruptcy which can make the debt almost impossible to collect.

THE RISK OF BANKRUPTCY

Bankruptcy can oftentimes delay the enforcement of foreclosure of the security. Nevertheless, if one gets a notice of bankruptcy they should immediately seek professional counsel and legal advice. So, when a person considers creating a promissory note he or she should include the appropriate legal forms for securing transactions. However, it's still a good idea to obtain professional assistance (and, legal advice) in enforcement of same.

DEATH AND BANKRUPTCY

The sudden death of a debtor does not void or eliminate the obligations of a Note in the eyes of the law. According to law, the personal estate of the debtor becomes liable on the Promissory Note and the holder of the Note should make claim on the executor of the person’s estate with an official creditor’s claim.

The real risk of course, is actual Bankruptcy. It is a far more dangerous event because it can make the situation almost impossible to recoup monies owing from an outstanding debt. In some instances, it can also legally discharge an unsecured Note. Even worse, using Chapter Eleven or Chapter Thirteen plans can oftentimes drastically reduce the amount owing on the Note and even stall and delay payments.

The person holding the Note usually discovers that the debtor has filed legal bankruptcy when he or she receives a formal written notice from the Bankruptcy Court. At this point in time (and, thereafter) it’s illegal to engage in any further attempts to collect outside of the legal jurisdiction of the Bankruptcy Court. In the event of this occurring, one should then seek immediate legal counsel.

Sometimes a promissory Note can be misleading because of its simplicity. While promissory notes can consist of dozens of pages (typically those of commercial Bank or Automobile loans subject to various legal requirements) they can also be scrawls on the back of a napkin.

Nevertheless, whether a promissory note is complex or simple, it makes good sense to get it notarized so that the obligation of the debtor is publicly recorded and legally valid. Do this and any violation will not be tolerated in a court of law.

In conclusion, if drafted wisely a simple one or two page promissory note can make all the difference between an uncollectible "bad debt" and speedy recovery of a significant amount of money. On the flip side, if you're the debtor, you might discover that errors and omissions in the drafting process may very well alter the odds of you having to pay.