Trying to collect on an unpaid debt can be difficult in any situation, but especially when you are trying to run a small business. Not being able to collect can lead to a lack of revenue and additional expenses due to the collection process.
If you are in possession of an outstanding promissory note or are thinking about creating a note for a customer, you may be wondering how the process works and what your options are should you be unable to collect the debt.
What is a promissory note?
A promissory note is a written agreement between two parties, the lender and the debtor. The note details the amount of money that is payable to the lender, as well as any terms of interest that may accumulate on the debt. The note can specify the payment date as fixed, determinable or on demand at the lender's discretion. If the debtor defaults on the loan, or the payments are late, you as the lender, have options to force payment of the note.
There is a statute of limitations in all states on debts. In Texas, that limitation is four years from date the debtor signed the note. If you have not received payment on the debt in that time, nor taken legal action to initiate recovery proceedings, under the law, the debtor is no longer obligated to pay you.
What if I use a collection agency?
If you are having trouble collecting on a debt, you may choose to use a collection agency. The cost can vary from collector to collector. Some agencies charge a monthly fee, while others keep a percentage of the collected debt.
Typically, an agency will contact the debtor to ask for payment. This can be done either by written notice or by phone. Agencies may also negotiate with the debtor and offer a payment plan or a discount if the individual can make a one-time, lump-sum payment.
What legal action can I take if the debtor refuses to pay the note?
If the debtor refuses to pay the note, you have the option to bring a civil lawsuit against the individual. In a successful suit, where the judge rules against the debtor, you may be permitted to seize certain property owned by the debtor, garnish wages or even intercept funds paid from a third party.
What if I choose to forgive the debt?
If the debtor is completely unable to repay the loan and you decide it is not worth pursuing with a collection agent or in court, you may choose to forgive the debt. Debt forgiveness may have tax consequences for both you and the debtor. It is possible that if you forgive the debt you will be able to claim the amount as a loss on your federal tax return and reduce your income tax liability. On the other side, the debtor may have to claim the amount forgiven as income and be liable for additional income tax.
If you are in possession of an outstanding promissory note or considering issuing a note, it is important that you understand the collection process and your options should the debtor refuse to pay. For advice concerning this issue, contact an attorney experienced with civil litigation.