How can I secure my interest in a promissory note from family?

Full question:

I am a resident of the State of Missouri. I hold a promissory note in the amount of $75,000 from my daughter and son-in-law which is in default. Rather than sue them , I have chosen to accept payment from them at the time of the sale of their residence in New York. They are in the process of a mediated divorce and the divorce agreement is supposed to state that after payment of the first mortgage and sales and closing expenses the remaining proceeds will be applied to this loan. I think I need a deed of trust that could be filed with the Recorder of Deeds Nassau County to in effect have a recorded lien on the property. Is this the bet way to secure my interest?

  • Category: Debts and Credit
  • Subcategory: Promissory Notes
  • Date:
  • State: New York

Answer:

A deed of trust is a document that secures a loan by pledging real property, often used instead of a mortgage in some states. Since there is already a first mortgage on the property, any transfer might trigger a due-on-sale clause, requiring the full balance of that mortgage to be paid. The first mortgage will take priority over any later liens, meaning that if the property is sold, those with liens ahead of you will be paid first, and you will receive any remaining proceeds.

We cannot provide legal advice, but it may be possible to create a new promissory note that uses other assets as collateral, such as stocks or bonds. A promissory note can be secured or unsecured. A secured note means that if the borrower defaults, the lender can take the specified collateral. If the borrower files for bankruptcy, the lender may recover the loan's value through the collateral instead of relying on partial payment from the borrower's assets.

All parties must sign the loan document, and a notary should witness the signatures. The contract may include a choice of law clause, specifying where disputes will be litigated. The loan document can then be recorded in the county recorder's office where the property is located. A secured promissory note creates a lien on the property but may be subordinate to existing liens.

A promissory note can outline payment terms, including installments or a lump sum. It may also include provisions for smaller initial payments followed by a larger balloon payment at the end. Additionally, a confessed judgment agreement may be included, allowing a judgment to be entered against the borrower without notice if they fail to pay. This type of note may not be valid in many states.

Types of notes include:

  • Promissory Note: A written promise to pay a debt.
  • Cognovit Note: A note allowing judgment against the borrower without notice.
  • Collateral Note: A note secured by collateral.
  • Demand Note: A note payable on demand.
  • Floating Note: A note with variable interest rates.
  • Recourse Note: A note where default may lead to loss of collateral and personal judgment.
  • Renewal Note: A note that extends the due date of a previous note.
  • Unsecured Note: A note not backed by collateral.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

Yes, a promissory note typically makes the borrower personally liable for the debt. When a borrower signs a promissory note, they are legally agreeing to repay the specified amount. If they fail to do so, the lender can pursue legal action to recover the owed amount.