Failure to Pay a Promissory Note

A promissory note is a legally binding contract executed between a lender and a borrower wherein the borrower agrees to pay back a specified sum to the lender at designated intervals with interest. The term or repayment period of promissory notes can vary, but typically ranges from three to five years. The consequences of failing to pay the stipulated amount when due will depend on the specific terms and conditions of the contract executed between the parties.

Promissory notes are used extensively in connection with financing arrangements for the purchase of automobile and other high dollar consumer items. A typical promissory note will state the total amount loaned, as well as the interest rate charged to the borrower. Repayment terms are stipulated in the contract and typically consist of equal installments payable each month by a certain date over a specified period of time until the balance is paid in full.

Many promissory notes contain acceleration or demand clauses, which provide that in the event of a missed payment, the lender may, at his election, demand the borrower remit the entire balance due and payable immediately. In addition, most promissory notes used in connection with automobile purchases grant the borrower a security interest in the vehicle as collateral for the loan. Some promissory notes contain a cure clause that allows a borrower who has missed a payment a certain period of time within which to remit the past-due payment in order to avoid a default, which would trigger the accelerated payment provision.

In the absence of a modified repayment schedule agreed to by the lender, should a borrower consistently fail to pay the monthly sums when due in accordance with the repayment schedule, a lender could either declare the borrower in default and demand the full amount due and payable immediately, and/or if a security interest is held, sell the collateral and assess against the borrower any remaining balance due.

In the event of a default, if a borrower fails to respond to a lender’s demand, pursuant to an acceleration clause for payment in full, the lender may file suit against the borrower for breach of contract. Most promissory notes contain a provision where the borrower, in addition to being held liable for the default balance owed, will also be assessed reasonable attorney’s fees incurred by the lender in attempting to collect the loan. Courts have consistently enforced these provisions against defaulted borrowers.