When someone borrows money from another person, the borrower executes a promissory note. A promissory note is a promise to pay the lender or a payee a sum of money at a certain time or on demand. It is a written financial instrument that includes the interest rate, repayment schedule, and penalties.
Problems arise when the borrower fails to pay the promissory note within the stipulated schedule. As a lender, more often than not, you will need a lawyer to enforce your rights to collect your money and any other fees due and demandable to you or to foreclose on the collateral. This is because no matter how many times you call the borrower to pay, if the borrower does not have the money to pay, the borrower will not be able to pay.
A borrower is considered in default when the borrower fails to make the required payments under the promissory note. When the borrower defaults, the promissory note usually includes an accelerate clause that allows the lender to accelerate the entire amount of the loan to make it due and demandable. When the loan is accelerated, the borrower has to pay the lender, not only the unpaid interest along with any other penalties for non-payment, the principal amount of the loan.
The promissory note will usually provide for a notice of default and acceleration to be sent to the borrower, which gives the borrower the opportunity to cure the default. If the borrower still fails to pay within the cure period, the lender is given the right to accelerate the entire loan and to call the entire amount of the loan as due and demandable.
When the borrower does not have the money to pay the lender, no amount or number of notices will magically give the borrower money to pay the lender. At this point, if you are the lender, you need to get a lawyer. Your borrower might still have assets that you can execute on. The faster you are in asserting your rights, the more priority you may receiving in enforcing the debt obligation when the debt is not secured.
Your remedies as a lender will depend on whether the debt is secured or not.
When the debt is secured with real property, you have two options:
Foreclosure is a legal process that allows a lender to sell the property and use the sale proceeds to pay the debt. In New York, once you decide to foreclose on the property, you cannot enforce the promissory note. You can either foreclose on the property or file an action to enforce the promissory note. You cannot do both.
For this reason, if you decide to foreclose on the property, you have to make sure there is no first mortgage that has priority and the value of the property is sufficient to answer for the debt. If the value of the property is insufficient, you cannot claim the excess from the borrower’s other properties.
Foreclosure can be judicial or non-judicial. Nonjudicial foreclosure requires the strict observance of a set of procedures provided in the mortgage. Judicial foreclosure requires the filing of an action. Initiating foreclosure requires the sending of a formal notice that contains the information required under law.
Foreclosing on real property requires you to strictly observe procedural requirements. Otherwise, your claim may be dismissed on technicality and you have to initiate foreclosure proceedings once again. It is important when foreclosing on property that you get a lawyer with experience in order to not waste time.
If the debt is unsecured or even if secured but you decide to enforce on the promissory note, then you file an action to collect on the promissory note. In New York, under CPLR § 3213, you can immediately file a notice of motion for summary judgment and the supporting papers in lieu of a complaint. This allows you an expedited process of collecting on the promissory note because you dispense with the filing of a complaint, and instead immediately file a motion for summary judgment.
When you enforce a promissory note and secure a favorable judgment from the court, you can execute this judgment against all non-exempt property of the borrower. Unlike in a foreclosure proceeding where you are limited to the value of the property, in a favorable judgment enforcing the promissory note, you can execute on all types of non-exempt personal and real property of the borrower, wherever it may be.
If you are a borrower who has defaulted on the loan, it is important to communicate with your creditors immediately to find a way for you to pay your debts. You could request for restructuring or refinancing. At the very end of the spectrum is filing for bankruptcy. A lawyer can help you in this regard.
An event of default is always an important occurrence, whether you are a lender or borrower. Having a lawyer beside you to navigate your options is important when there is default. If you experienced default, whether as borrower or lender, we at the law offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].