Quite often, individuals decide to make cash loans to others. Most of the time, they make the decision to put the terms of the loan on paper so that they may be able to enforce their rights in the event that the borrower does not pay them back. In an effort to save money or to make the process easier, an individual lender may decide to take legal drafting into their own hands. One common way that this is done, is by making the choice to search the web for the term “promissory note,” pulling up a template that looks official, and filling in the blanks. The assumption may be that if the document is published online, it must be sufficient. Unfortunately, these templates or documents found online are not tailored to a lender’s particular situation and often leave out important provisions. In a legal document such as a promissory note, every paragraph has a purpose, and to omit one paragraph may completely change the lenders legal rights.
One common example is the “Acceleration Clause”. An acceleration clause states that if there is a default of the promissory note, such as non-payment, the lender has the ability to accelerate and call the entire balance of the note due. Let’s say you are a lender and your promissory note has an acceleration clause. There are monthly payments that go on for three years and the borrower has already defaulted on the first few with no intention to pay you back. When you file suit, you are able to request that the court award you the entire remaining debt, not just the payments missed. On the other hand, if you are a lender in the exact same situation but your promissory note lacks an acceleration clause, you will not be able to get the same award. Your recovery will be limited only to collection for the payments that were missed prior to your lawsuit. In order to request the full amount due, you will have to wait until other payments are defaulted on.*
This large difference in outcome is due to the lack of one small but important paragraph. As you can see, one omission is capable of significantly altering your rights. It is important that your legal documents be tailored to your individual situation and includes all language necessary to protect your interests. As always, should you have any questions regarding the foregoing please contact your real estate attorney.
*Note that promissory notes are subject to a statute of limitations which is not discussed in this blog.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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