Notes Payable and a Default Bankruptcy

Notes Payable and Promissory Notes

Notes payable are formal documents drawn up by creditors for loans made, according to the website Simple Studies. A note payable is also called a promissory note because it is a written promise to repay a principal amount plus the interest. The interest owed is calculated by subtracting the principal of the note and multiplying it by the rate of interest in dollars and the duration of the loan in months, according to the website ExpertLaw. If a person cannot pay back a portion of the loan, it is considered a receivable amount or bad debt.

Default

If a customer goes into default, he will not have made a payment on the principal of the note payable for 90 days or more. The lender will give the borrower a specified amount of time to repay all the the loan in full, renegotiate terms of the loan or place the borrower through a debt program. If the debtor cannot repay the loan or chooses not to, he is considered insolvent, according to Cornell University Law School. Credit rating agencies will be notified that obligations to the note payable were not met, which can greatly impact a credit score.

Bankruptcy

If a customer or business is considered insolvent they must file for bankruptcy to resolve the notes payable with their lenders. The U.S. Bankruptcy courts will try to work out a plan for the debtor to repay the lender within a specific amount of time or find an alternative way for the borrower to pay off debts. If a person's income is not enough to aid in repaying the debt, then the borrower will be discharged of the debt, but the bankruptcy will remain on her credit records, making it hard for her to get another loan, according to the U.S. Bankruptcy Courts.

Types of Bankruptcies

There are several types of bankruptcies a person or a business can file to settle notes payable with lenders. In Chapter 7 bankruptcy, a court will liquidate the borrower's assets and sell them for cash to repay the lender. Chapter 11 bankruptcy is for businesses that want to continue operating and will repay lenders with a court-approved plan. A person who has a source of regular income may file for Chapter 13 bankruptcy. In Chapter 13 bankruptcy, a borrower must repay a lender within three to five years. This type of bankruptcy allows borrowers to keep assets, according to The United States Courts.