How Does Acknowledgment of Debt Work?

Whether it is for business transactions or simply to lend money, it is important to have an IOU as proof of an existing debt. Although an IOU is not considered a legally binding commitment, it is usually followed by a more formal written agreement that contains all of the terms and conditions of the contract. As an individual, it is important that you understand how an IOU works.

What does an acknowledgment of debt correspond to in France?

Essentially, it comes into play when two individuals complete a transaction that involves money. The term IOU dates back to the 18th century and is still used today, both for business purposes and also in accounting, where it refers to accounts receivable. On closer inspection, an IOU is a document that records the debt and the informal agreement that one party makes to pay another party. Unless it is followed by a legal contractual document, the acknowledgment of debt is not legally binding, which makes it difficult to assert in court. Furthermore, an IOU is not a negotiable instrument, therefore, it cannot be transferred as a means of payment such as checks, money orders or promissory notes.

How to write an IOU?

Person signing an IOU

There isn’t really a standard way, format, or terminology that exists for writing an IOU, however, there are some painstaking details that must be included on the document. This includes :

  • The date of the agreement
  • Amount of debt
  • Repayment date
  • List of parties involved

To come up with a complete IOU document, here are some other things you should consider including:

  • How debt is supposed to be repaid, whether in one go or in installments
  • A repayment schedule that captures the size, and frequency of payments when it comes to installments
  • If there is interest charged, and if so, at what rate
  • A debt guarantor
  • State Laws Governing This Agreement
  • Signature of lender and borrower.

What is the lender’s recourse?

Although written with a lot of information, the IOU is not legally binding. Instead, it lays out the basics of a loan deal and eventual future referrals. As a lender, your best chance of recourse is to legally compel your debtor to pay. However, if you haven’t agreed to a contractual agreement that usually comes after an acknowledgment of debt, you can’t go through the legal process. At this point, as a lender, you are at the mercy of the borrower, and this is one of the reasons people always follow an IOU with a real contract. As you speak with your lawyer, you may discover other possibilities to get your money back the right way.

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