What can happen if I fall behind on a promissory note?

I purchased a business and the seller held a note for $300k. A year later she sold the note to another individual. Due to the economy it has been difficult for me to make my payments and now 3 months behind. I don’t have any assets (I rent, no savings, etc.). There is also a 2nd note on my business for $260k to someone else. When the note was sold the original note holder signed some kind of personal guarantee which I do not know the details of. What can happen to me or my business if legal action is taken or balance due is called. If I can’t even make a monthly pmt how can I pay the balance?

Asked on October 31, 2011 under Bankruptcy Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Once you fall behind on a promissory note, you can be sued over it. So if you personally gave the note (as oppposed to, say, a corporation or LLC issuing the note), then once you fall  behind on payments you can be sued personally. It may be that it would be difficult to collect from you, if you have few or no assets, but you still could potentially have your income garnished; have a bank account levied; have personal property of yours executed on (sold); your credit rating will be damaged; and if you are sued and a judgment obtained against you, then that judgment will remain for year and could be enforced at some later date, when you have more to lose. Also, if the business is owned solely by you, then the business itself is an asset which creditors could try to reach. This could include both business asserts (e.g. machinery, real estate, inventory, furniture/office equipment, accounts receivable) and potentially the business a whole, depending on the situation and how the business is structured.

Given how much is involved, if you default and are sued, you may need to consider bankruptcy as an option.

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