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A debt agreement letter is a legally binding contract between someone who borrows money, the promisor, and the person who lends the money, the payee. The letter should include how and when the repayments will be made as well as any penalties if the promisor defaults on debt payments.
If it is properly written, the letter can be used as evidence in court if it becomes necessary for the payee to go to court to get the money back.
It’s a good idea to write a debt agreement letter whenever a person loans money even to a family member, friend or colleague. Loaning money is a business transaction and should be treated as such. The letter will eliminate any possibility of confusion later.
Debt Agreement Will Protect Payee And Promisor
This letter will protect both the payee as well as the promisor. The payee wants legal proof that they loaned the money and that the promisor agreed to repay it.
The promisor wants legal proof of how much they borrowed, so the payee cannot claim the amount was higher at a later date.
It is recommended to sign the letter in front of a notary. This may require a small fee. If it is not possible, then witnesses should also sign the letter. A copy should be made so both the promisor and payee has one.
If the debt agreement letter is between business partners or for official loans, the amount of interest that will be charged for the duration of the loan should be mentioned. For loans between friends, interest is often not charged, but should be mentioned if it is charged.
The letter should be very concise to avoid confusion. It should include:
- The legal name of both the promisor and the payee
- The total amount of the loan
- The terms of the repayment
- What the payments are for
- When the payments are due
- How the payments will be made
- When the last payment should be made
- Any penalties for defaulting
- Any grace period for late payments
The letter should have a signatory area at the bottom, and it is recommended that there be space for a witness signature for each side. The format should be accurate if it is to be seriously considered in the event the payee needs to go to court.
Two Main Types Of Debt Agreement Letters
The two main types of debt agreement letters are for a lump sum and for a payment plan. The information at the beginning and end of the letters is the same. Only the body of the letter is different. Here are samples of each type of debt agreement letter.
If a notary is not used, the letter can be sent by certified mail by the payee or promisor to themselves. This will give the time and date the letter was signed. This may be crucial information if the payee takes the promisor to court.
Sample 1 - Payment Plan Debt Agreement Letter
FULL NAME OF PAYEE
FULL NAME OF PROMISOR
DATE OF LOAN
DATE REPAYMENT IS DUE
TOTAL AMOUNT DUE
TERMS OF AGREEMENT:
I, FULL NAME, borrowed $500 from FULL NAME on DATE. We both agreed that the money would be repaid in a series of scheduled payments.
I, FULL NAME, will repay the loan with a personal check in a series of $100 payments every month for five months starting DATE. The payments will be given to FULL NAME on the first of every month beginning with June 1st with the last payment being made on October 1st.
I, FULL NAME, will pay a $5 per day late charge for any payments that are not on time as agreed until the loan is paid in full.
The payee and the promisor agree to the payment agreement terms listed above.
Signed:
Signature of Promisor DATE
Printed full name and address, email address, phone number of promisor
Signature of Payee DATE
Printed full name and address, email address, phone number of payee
Signature of Witness(s) DATE
Printed full name and address, email address, phone number of witness(s)
Sample 2 - Lump Sum Debt Agreement Letter
FULL NAME OF PAYEE
FULL NAME OF PROMISOR
DATE OF LOAN
DATE REPAYMENT IS DUE
TOTAL AMOUNT DUE
TERMS OF AGREEMENT:
I, FULL NAME, borrowed $500 from FULL NAME on DATE. The money is to be repaid in one lump sum.
I, FULL NAME, promise to repay the full amount, $500, with a personal check on DATE. I agree to pay a late fee of $5 per day until the loan is paid in full if I am not able to make the payment on the agreed date.
The payee and the promisor agree to the payment agreement terms listed above.
Signed:
Signature of Promisor DATE
Printed full name and address, email address, phone number of promisor
Signature of Payee DATE
Printed full name and address, email address, phone number of payee
Signature of Witness(s) DATE
Printed full name and address, email address, phone number of witness(s)