How can I make sure there is proof I loaned someone money?
January 3, 2008 4:16 PM   Subscribe

Would an agreement to pay back a personal loan by a specific date, signed and notarized by both parties be a legally binding document?

This is in Wisconsin, if state laws matter.
What is the best way to go about this: I am going to make a loan (about $2000) to a friend, and I want some sort of proof of it and an agreement that he will pay me back, that would stand up in court. I don’t expect it to come to that, obviously, but I want to cover my ass just in case. Should I get the document notarized? Would this make a difference?

Any advice on how to word such an agreement?

(and please, there is no point advising me not to make the loan, that's not what I'm asking about)
posted by catatethebird to Work & Money (11 answers total) 3 users marked this as a favorite
I do not know Wisconsin law, and this should not be construed as legal advice. But elsewhere, an agreement to repay the loan of a set amount, in that amount, by a specific date would be legally enforceable regardless of whether it is in writing, let alone notarized. But it is a good idea to put it in writing, and not a bad idea to have notarized, if only to reinforce to your friend the gravity of the commitment. Make sure you address the date, whether it is to be repaid in cash, the interest rate if any, and anything else that seems sensible. You will probably not want to spell out the remedy for a breach. Likewise, a lawyer would put in choice of law clauses and lots of other boilerplate, but it probably isn't material to you.
posted by Clyde Mnestra at 4:31 PM on January 3, 2008

Especially since you'd be taking him to small claims court, yes, that's almost definitely sufficient. Getting it notarized wouldn't hurt, and should erase any doubts if you're seriously worried he'll try to bail out on it.

Wording isn't terribly important, given how simple the arrangement is. You should probably include the date the loan starts, the date it's to be paid back by, and any other relevant terms. Again, because it's such a small loan with very simple terms, and it'd all be in small claims court, plain English will do you just fine. Write it out logically, get it signed, and make copies.

Disclaimer: A Constitutional Law class in college is as close as I ever got to being a lawyer. Plus I'm in PA, not WI. YMMV. No refunds if advice leads to injury or sudden death.
posted by Tomorrowful at 4:34 PM on January 3, 2008

How'bout something like Virgin Money?
posted by null terminated at 4:38 PM on January 3, 2008

You may also want to consider getting collateral. Does your friend have possessions (a car, for example) that might serve as collateral for the loan? For a very small amount of money, possibly even for free, an attorney could advise you as to how to hold collateral for a small personal loan in a way that would be legally binding (e.g., you hold onto the title to his car until he repays you, or he gives you his gold watch and you give it back when he repays you). You can write that into your contract. That's the sort of thing a bank would require, and if you want to treat this like a business arrangement rather than like a gift from one friend to another, you shouldn't half ass it.
posted by decathecting at 4:41 PM on January 3, 2008

IAAL, but I am not your lawyer, and this is not legal advice.

Clyde is right, the agreement would be binding even if it weren't written down at all. But, of course it's very good to have a written document, because this is proof that establishes exactly what the parties agreed to, and I think you should definitely do at least that much. As Clyde says, make sure you put down every term you think is important.

It doesn't matter if its written in plain english, or even if it's written in crayon on the back of an envelope. In law school we read a case about a contract that was signed on the back of a restaurant receipt. It was binding, and it was enforced.

Notarizing just makes it better proof. I.e., if he later decided to lie and say it's not his signature, or it was signed on a different date, you'd have the notary's signature to contradict that. It's certainly not necessary, but if you want to have the best proof you can, it doesn't hurt anything. Businesses rarely get their contracts notarized, for what it's worth (but then, they have a lot more of them, so it would be a much bigger hassle).
posted by kingjoeshmoe at 4:42 PM on January 3, 2008

Here is a link to relevant contract law in Wisconsin.

Generally speaking, you just have to write down the terms of your agreement and have both parties sign it for it to be enforcement (although Judge Judy routinely deals with far less sophisticated contracts, and oral contracts may also be enforceable by law).

I'd be sure to write the following down:

1) Amount loaned
2) Date of Loan
3) Date/Form of Repayment (5 payments of x, or payment in full by x with Y% interest, etc).

Depending on how you want to deal with this, you can also include provision that lendee will pay any/all costs associated with collecting the debt provided it isn't paid in time (like court costs/legal fees).

Signature by both parties. Notarization is a bonus, but not required.

Make sure that you both have a signed copy of the contract (which may mean printing/signing two or signing one and copying it).

Finally, please be sure that ALL terms of the agreement are explicit in the contract. For example, if you want to make sure that you receive the money by cashiers check, say so. If you are expected a % interest, clarify how you are calculating that (simple vs. compound).

Good luck. :)
posted by batcrazy at 4:45 PM on January 3, 2008

Response by poster: Thanks for all the good advice so far!
posted by catatethebird at 4:51 PM on January 3, 2008

You do NOT want a general contract, you want a promissory note. The difference is with a promissory note, if they don't make payments, the full amount is due.
posted by AaRdVarK at 4:53 PM on January 3, 2008

You do want a promissory note, but a promissory note is just a written contract, signed by the borrower, wherein the borrower promises to pay the lender a particular amount at a particular future time.

A promissory note providing for multiple payments can include an "acceleration clause" that causes the entire outstanding principal to become immediately payable if the borrower defaults on a payment. This can be useful, since the lender probably doesn't want to sue the borrower ever month or so as the payments individually become past due.

I don't know if Wisconsin imputes an acceleration clause in all promissory notes, but if you want the behavior I described, you might as well include it explicitly. If you do include an acceleration clause, consider whether the borrower should be allowed to "cure" a breach before the entire amount becomes due. If you were planning on there only being a single payment at maturity, this is all pretty irrelevant.

More generally, make sure your promissory note has an actual promise in it. It should say "I, John, promise to pay Jim $2000." It shouldn't just say "John owes Jim $2000," because that's not a promise to pay, and if you want an enforceable promise, it's a good idea to have a promise to begin with.

Also, the promissory note should make clear that it's not a gift promise. You don't want your borrower later claiming that he only promised to pay you $2000 out of charity, because that will be harder to enforce. Language such as "For good and valuable consideration, the sufficiency of which is hereby acknowledged, I, the undersigned, promise to pay..." can make it clear that the borrower really was promising to pay, and he was doing it in exchange for something you did for him, and whatever it was you did for him was sufficient to justify his making the promise.

Another thing to consider is including an "integration clause," which provides that the entire agreement is recorded in the promissory note, and that nothing said prior to the execution of the note is part of the agreement. This is a double-edged sword, of course, so be careful that the note actually says everything you want it to say!

Also, it can't hurt to state that any waiver of a breach has to be in writing. That way, if the borrower breaches and you are slow to enforce the note, he'll have trouble saying that you orally or otherwise waived the breach, abandoning your right to enforce the note (well, he can say it, but it won't due any good).

You might as well throw in language making clear that the note is intended to be binding. It can't hurt. A "severability clause" is something else to think about. It provides that if any provision is unenforceable, the remaining terms of the contract will still be binding on the parties.

In addition, as other people have said, it needs to include:
* Identity of the parties
* The principal amount
* Interest, if any (including interest on past due amounts)
* Payment schedule and maturity date (the date all remaining principal and interest becomes due)
* Forms of payment acceptable
* Method of payment delivery
posted by "Tex" Connor and the Wily Roundup Boys at 5:41 PM on January 3, 2008 [3 favorites]

Tex, I heart your thoroughness!! THAT's how to answer a question.
posted by I_Love_Bananas at 10:09 AM on January 4, 2008

Tex, that was fantastic. I'm always heartened when I see an answer that fulfills the practitioner's duty to educate the public rather than yielding to excessive caution in avoiding unauthorized practice.

A quick additional note on integration clauses. An integration clause triggers what's known as the parol evidence rule (yes, parol). Parol evidence is a statement or statements, often oral, made outside of your contract. In the presence of an integration clause, the parol evidence rule makes contradictory statements external to the contract inadmissible in court if there's a dispute. As Tex said, it's a double-edged sword - unscrupulous folks can and do take advantage of people with this rule. I've seen it happen a lot with apartment leases.

In any event, if something turns out to be missing and there is an integration clause, it's not the end of the world. The parties can simply agree to amend the contract to include the missing piece. That would be harder if you and your friend are on bad terms when you spot the problem, which hopefully won't be the case here. All said, though, it's a good motivator to really take your time and make sure everything is in the document the first time. Tex's list of what should be included is great, and just make sure to consider whether you have any assumptions or are taking anything for granted, and then talk with your friend about those things. Anything where there could be two reasonable interpretations should be clarified and included.
posted by averyoldworld at 11:46 AM on January 8, 2008

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