A promissory note is one of the most common and practical legal documents used in financial transactions between private individuals or companies. With a promissory note, the debtor de facto acknowledges his debt in writing and undertakes to repay it within an agreed period of time. What do you need to know about promissory notes?
The promissory note serves as written evidence that the debtor acknowledges his debt and undertakes to repay it within an agreed period of time. Compared to verbal agreements, the written form of the promissory note is a much stronger legal instrument and therefore provides the creditor with greater certainty and the ability to use this document to better protect their money. Let’s take a look at how a promissory note works, how to draw it up and what it should contain to avoid potential legal complications. We’ll also explain the importance of a debt acknowledgement agreement.
A promissory note is a document in which the debtor acknowledges in writing the existence of a debt owed to a creditor. This document is not only a formal acknowledgement of the debt, but also serves as a legally binding document on the basis of which the creditor can, if necessary, enforce the debt through the courts. In the Czech legal system, the promissory note is regulated by the Civil Code.
The law is clear that acknowledgement of a debt restores the limitation period and provides the creditor with legal certainty that the debt will be more easily enforceable.
In practice, the promissory note is mainly used for loans between private individuals who do not use banking or other financial services. So, for example, if parents lend their child money for a car or renovation of a flat and want to have this loan recorded in writing, they can draw up a promissory note in case the child does not want to pay back the money. In these situations, a promissory note can make it much easier and faster to collect the debt if the borrower defaults.
A promissory note is often confused with other legal documents such as a loan agreement or promissory note. Although these documents serve similar purposes, there are key differences between them. For example, a promissory note differs from such a receipt in that it does not prove the repayment of the debt, but merely informs of its existence.
It also differs from a loan agreement. This contract defines not only the borrower’s obligation to repay the amount, but also other terms of the loan, such as the interest rate, the repayment terms and any security for the loan. The loan agreement is therefore a more complex document than the promissory note, which focuses primarily on the acknowledgement of the obligation. Thus, if we return to the example of parents who want to lend to their child to renovate their flat, if the parents define additional terms of the loan, for example that they want an extra CZK 1 000 for each year of repayment, they should already have drawn up a loan agreement and not a promissory note.
Other conditions apply to the promissory note. A promissory note is a security that represents an obligation to pay a certain amount either on demand (sight draft) or at a specific date (fixed-dated promissory note). However, you can easily transfer a promissory note to another person, which a promissory note will not allow you to do.
The main advantage of a promissory note is its simplicity – it does not require a complicated structure and can be drawn up relatively quickly. On the other hand, its legal value is still strong enough for the creditor to enforce the debt.
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When drawing up a promissory note, it is important to follow certain rules to give the document legal weight. We strongly recommend using the services of an Affordable Lawyer in this case. Our attorney will draft the promissory note so that it meets all the necessary rules.
If you would still like to draft the document yourself, the following sample promissory note will serve as a foundation that you can modify to suit your specific needs. However, we always recommend that you use the services of an attorney.
I, [Debtor’s name], born in. [date of birth], residing at [debtor’s address], hereby acknowledge that I owe the sum of [amount owed] CZK to Mr/Ms [name of creditor], born [name of creditor]. [date of birth], residing at [address of creditor]. I undertake to repay this debt by [due date].
In the event that the debt is not repaid by that date, I agree to pay interest at the rate of [amount of interest] % per annum and any contractual penalties of [description of penalties].
At [place], on [date]
Borrower’s signature:
Lender’s signature:
You can adapt this template to your specific requirements, for example by adding the interest rate, detailed payment terms or any guarantees. However, make sure that you word each point clearly and in detail so that there are no misunderstandings or disputes afterwards.
Another important document is the debt acknowledgement agreement. This agreement serves to formally confirm that the debtor acknowledges the debt and agrees to repay it. In a legal sense, the acknowledgement of debt is particularly important because it renews the limitation period. If the debtor did not acknowledge the debt, the creditor would have only a limited period of time to pursue its claim through the courts. Acknowledgement of the debt, however, reopens this period.
The acknowledgement agreement should contain all the same important elements as the promissory note, but may also include other arrangements, such as a repayment schedule, interest or repayment terms.
Tip: For those who need a practical solution without unnecessary formalities, we offer a debt recognition agreement. Simply contact us online and we will prepare a debt acknowledgement agreement for you.
If you are planning to use a promissory note or an acknowledgement of debt agreement, you should know that these documents have legal consequences. As we mentioned above, acknowledgement of debt extends the statute of limitations, giving the creditor more time to potentially collect the money through the courts. If the debtor defaults, the creditor can take legal action and the promissory note or acknowledgement agreement serves as evidence in court.
You should also insist that the document is properly drafted and signed by both parties. Ideally, the promissory note should be signed in the presence of witnesses or a notary, which increases its legal weight and makes it more difficult for the debtor to deny the debt.
A promissory note is one of the most practical legal documents used in financial transactions between individuals or companies, as it is a written acknowledgement of a debt. In it, the debtor undertakes to repay the creditor a certain amount within an agreed period of time. Compared to verbal agreements, a promissory note is more enforceable in court and is therefore often used in informal lending situations, for example between family or friends.
A promissory note differs from other documents, such as a loan agreement or promissory note, in its simplicity and legal force. Its main advantage is its easy structure and quick drafting. A promissory note also extends the statute of limitations, giving the creditor more time to pursue the debt through the courts.
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