What to Do If Your Promissory Note Goes Unpaid

Problem:

You loaned your old college buddy a few thousand bucks to help him out of a jam. He signed a promissory note promising to pay the money back in a series of monthly payments. Things started off well, and he made a couple of payments. But now three months have gone by without a payment, and he's avoiding your calls. You're faced with a dilemma - he's an old friend, but you can't afford to just write off the money you loaned him. You've got a family to think about. Should you sue him? CAN you sue him?

Solution:

You were smart - you got the borrower to sign a promissory note. A lot of people lend money to friends or family on a handshake and a verbal promise. But those don't stand up well in court if you have to sue to get the money back.

That signed promissory note you have in your hand is an unconditional promise by your friend to pay the money back, including interest. It is a negotiable instrument, just like a bank draft or a cheque. It signifies his understanding of the terms and conditions on which you loaned the money, and his agreement to accept those terms and conditions.

What You Need to Do Now

First, you need to make every effort to collect the debt before you decide to sue. Document everything - all your demands for payment must be in writing if you're going to use them in a court of law. Keep a copy of all correspondence to and from the borrower. If your written demand for payment doesn't get any results, give him written notice that if the arrears are not paid or a payment schedule has not been agreed to within a certain number of days (30 is reasonable), you're going to take legal action.
You can bring a lawsuit against the borrower in the state, province, or territory that he lives in. If it's the same one you live in, it will be a simpler process. Check with Small Claims Court to see if the amount of your claim falls within the small claims limit - most likely it will, and you'll be filing your claim there.
Take all your documentation with you to the court house. You'll have to file copies of it when you file your claim. Remember to include your court costs and interest (if you charged any) in your claim.
On the date of the hearing bring everything with you, including copies of any emails or voicemails you received from the borrower. In Small Claims Court, you act on your own behalf, which can be rather daunting. Just answer all the judge's questions honestly and as briefly as possible.
If the judge rules in your favor, you'll have a judgment against your ex-buddy. The tough part will be collecting it. Once you get a judgment, you can try to enforce it, but if the borrower has limited assets or if he declares bankruptcy, you may not get much of anything for your troubles. You can garnishee his wages if he's working.

It's up to you to weigh the pros and cons and then decide whether or not to take legal action. How much was the loan for? How much will it cost you to sue him? Can you afford to swallow the legal costs if you're unable to collect on the judgment? Those are questions only you can answer.