Promissory note: Why is it one of the most practical legal documents?

Quick overview

A promissory note is a written statement by a debtor that he or she acknowledges a specific debt to a creditor. It is most often used for loans between acquaintances, within a family, or between businesses when the parties want to have the debt evidenced.

To be useful in collection, it must be clear who owes who, how much, for what reason, and when the debt is to be repaid. Furthermore, the acknowledgement of a debt under the Civil Code can fundamentally affect the statute of limitations.

Do you need a loan or a debt to be legally treated so that it can actually be collected later? Let us prepare a promissory note, a debt acknowledgement agreement or a tailor-made loan agreement.

A promissory note is especially useful when:

• you want to have written proof of the existence of the debt,
• you are lending money to a family member, friend or business partner,
• the borrower already has a debt and you want them to explicitly acknowledge it,
• you need to clearly set the repayment, instalments or interest,
• you want to reduce the risk of a dispute over whether the debt existed in the first place.

What is a promissory note?

A promissory note is a document in which the debtor acknowledges in writing the existence of his or her debt to the 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.

In our experience, the biggest disputes do not arise in complex business loans, but in informal loans between loved ones. Typically, one party claims it was a loan, the other claims it was a gift or household contribution. This is why it is important to include in the document not only the amount and repayment period, but also the reason for the debt and how the money was given.

How is a promissory note different from a receipt and other documents?

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 a receipt in that it does not prove 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. A loan agreement is therefore a more complex document than a 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.

The biggest problem with loans between people who are close to each other is that the parties “agree everything verbally” at the beginning, and only when they have a dispute do they find out that there is no repayment period, no proof of handing over the money or no agreement on interest. If you are unsure whether a promissory note is sufficient or you already need a loan agreement, we will prepare a document that is true to the actual situation and does not create unnecessary vulnerabilities for future enforcement.

Different terms apply to a promissory note. A promissory note is a security that represents an obligation to pay a specific 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.

Promissory note sample

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.

Debt acknowledgement agreement

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.

Legal and practical aspects of promissory notes and acknowledgement of debt

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.

From our experience: a client lent a friend a large sum of money to start a business. They only had a brief receipt of the money, but the maturity date was missing and it was unclear whether it was a loan, an investment or some other form of support. The borrower later claimed that he did not have to pay the money back immediately. Similar disputes can be avoided by ensuring that the promissory note or acknowledgement agreement accurately describes the reason for the debt, the amount, the repayment due, any repayments and the consequences of default.

Practical advice on arranging a promissory note or debt acknowledgement agreement

1. Pay attention to every detail: every point in the document should be clearly specified. Specifying unclear terms can lead to disputes later.
2. Use signature verification: If possible, it is recommended that you take advantage of having both the debtor’s and creditor’s signatures notarized. This provides you with an additional guarantee that the document will be valid and cannot be challenged.
3. Don’t be afraid to seek legal advice: for larger sums or more complex obligations, it is advisable to consult a lawyer to draw up the documents, who can ensure that the document is drawn up correctly and in accordance with the law.

Summary

A promissory note is a practical document by which a debtor acknowledges a specific debt to a creditor in writing. To be of real value in proof and collection, it should clearly state who owes who, how much, for what reason, and when the debt is to be paid. It differs from a loan agreement in that it usually acknowledges a pre-existing debt, whereas a loan agreement regulates the actual provision of the money and the conditions for its repayment. Acknowledgement of debt may extend the limitation period and significantly strengthen the creditor’s position, but it is not in itself a substitute for a well-set contract, a repayment schedule or stronger security. For larger sums, family disputes or risky debtors, it is therefore worth having the document prepared by an attorney and considering a notarial deed of trust.