If you are the holder of a promissory note and discover that you've lost the document, steps need to be taken quickly to protect both yourself and the borrower. A lost note can deprive you of the ability to obtain payment. If a third party finds the note, they may be able to enforce it against the borrower, including foreclosing on any collateral that may secure the loan.
Generally, losing a promissory note does not eliminate the borrower's obligation under the note. However, fairly recently, courts have refused to allow some lawsuits for defaults on student loan promissory notes where the notes were sold and the current noteholder can't produce the documents.
Your first step is to conduct a thorough search for the promissory note. Also search for any copies of the note, and any originals or copies of related documents such as a mortgage or security agreement, amortization schedule, and correspondence with the borrower regarding the loan. If you have the promissory note or related documents stored on a computer in a word processing, scanned, or digital photograph format, print out copies.
It is also important to promptly notify the borrower that the note is lost, and request that a new promissory note be executed. It is common for promissory notes to include a provision requiring the borrower to execute a new note in the event the original is lost.
How to reestablish a lost promissory note
Lost promissory note laws can vary some from state to state, but they are fairly similar, since all states have adopted some version of the Uniform Commercial Code.
Along with the new promissory note, you will need to execute a document called an Affidavit of Lost Promissory Note and Indemnity Agreement. The main purpose of the Affidavit of Lost Promissory Note and Indemnity Agreement is to protect the borrower. It assures that the borrower will not be held liable under both the original and the new note, and will not incur any costs in relation to executing the new note.
In general, the affidavit will include the following information:
- The names of the borrower and the noteholder
- The terms of the note
- The current balance due
- Whether the note was lost, stolen, or damaged, as well as any details as to how the loss, theft, or damage occurred
- What action was taken to try to locate the note, if it isn't certain how it was lost or stolen
- A statement that the note has not been sold or otherwise transferred to another party
- A statement that the borrower will no longer be obligated under the lost note, and that the borrower will not incur any costs in connection with reestablishing the note
If available, a copy of the original note should be attached.
The affidavit must be signed in the presence of a notary public.
If the borrower refuses to sign a new promissory note, you will need to establish the lost note in court. This will require filing the affidavit along with other court documents.
Lost promissory note paid in full
Different actions need to be taken if you discover the promissory note is lost after the borrower has made the final payment. In this case you would simply prepare a satisfaction of promissory note document, verifying that the loan has been fully paid. If the promissory note is secured, you would also execute a satisfaction of mortgage or satisfaction of security agreement.
Preventing loss of a promissory note
An original promissory note, and any related documents such as a mortgage, security agreement, or amortized payment schedule, should be kept in a safe place. This might be a safe deposit box, safe, or other secure storage facility. Copies of the documents should be made, and kept in a separate place from the originals. Scanned or photographed images of the documents also can be kept in a computer file. Even if the original note is lost, the other original documents or the copies can be used to establish the existence of the loan.
You may want to hire an online service provider to assist you in preparing the replacement promissory note, as well as the Affidavit of Lost Promissory Note and Indemnity Agreement.