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IOU vs. Promisory Note

July 1, 2009 | 1 Comment

An IOU (I Owe yoU) is an acknowledgment of debt, normally specifying debtor, the amount owed, and sometimes the creditor.  A Promissory Note is a contract specifying unconditional terms on how to pay the debt, including interest (if any) and time of repayment.  The State of California is issuing IOUs to their vendors (essentially telling them I owe you money, without specifying when or how to repay).  However, when possible, you may want to require a Promissory Note rather than an IOU.

NOTE: If you want to provide someone a loan, make sure you do charge an interest.  Otherwise, it may be subject to gift taxes if the note is larger than the gift exemption (currently $13,000).  Current rates (in the USA) are published by the IRS.  (When reading them: short term is less than three (3) years, mid term is less than nine (9), and anything over nine (9) is long term.)

NOTE: Do I need to sign in front of a Notary or Witness?

A1. Generally speaking, there is no requirement for a witness or notary public to witness the signing of the Promissory Note. However, depending on the nature of the note and the governing law of the jurisdiction in which you’re entering into the note, you may be required to have witnesses or a notary public witness the Promissory Note. Even if it is not required, having an objective third party witness the signing of the note will be better evidence when you need to enforce the repayment of the note. Signing the note in front of a notary public is the best evidence that the Borrower signed the note.– Law Depot

A2. General Laws of Massachusetts do not require Promissory Notes to be signed by a Notary.  However, there seem to be some benefits when enforcing them when they are signed in front of a Witness — especially on family/probate situations.  Other states laws may vary.  Always consult qualified legal advice before making a decision.

If you need to enter into a binding Promissory Note, you can create one by using many of the available templates online.

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1 Comment so far

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