having trouble figuring out what the interest rate is here,
As It's Written, for my sister...
[note amount is $115,000]
which monthly amount is it, legally?
1. .01% per month is $11.50 per month
2. .01 per month is $1,150 per month
the intent was to charge $1,150 per month, but legally,
the way it's written, is it actually $11.50 per month?
On 09/25/2015 3:54 PM, firstname.lastname@example.org wrote:
Ayup...the latter, that is. Of course, this is late charge only, not
overall interest rate...it's right there in black and gray... :)
".01% per month" is indisputable; there isn't even an additional
word-phrase enumerating the intent upon which to rely.
On Friday, September 25, 2015 at 5:21:02 PM UTC-4, dpb wrote:
Agree. Only possible place to maybe hang ones hat would be
if the same thing is done somewhere else, with some other
percent thing and there is some additional verbage that
shows that case means otherwise. Then I guess if you could
win on that other one, you might be able to prevail that
this is the same, a mistake, etc. And like you say, what
it amounts to is effectively the late fee is very little.
Also, the second interpretation, doesn't say what he thinks either.
" .01 per month is $1,150 per month"
That would literally mean 1 cent a month. What he really wants I think
is 1% per month.
On Friday, September 25, 2015 at 2:43:28 PM UTC-8, trader_4 wrote:
i Know they Want 1% per month,
but if you get out a calculator and multiply .01% times 115k,
you come up with only $11.50...
...so did they make a typing error, i guess is what i'm wondering.
And would it be legally binding, since this is the only mention, in the note?
On Friday, September 25, 2015 at 7:41:58 PM UTC-4, email@example.com wrote:
Ultimately if the borrower defaults and then will only agree to
the .01% penalty rate, you'd have to get a court to agree with you
that it's actually a typo and that 1% is what they meant, as opposed
to what's actually there. How that would go, IDK. If you could
clearly demonstrate the intent was 1% and the .01% was a typo,
you probably could prevail. For example if you have some emails
that show 1% was what was discussed, back and forth, witnesses
that would testify 1% was the agreed amount, previous drafts
of the agreement where it was 1%, etc, then with enough of that
and the other side having nothing, you could probably prevail.
On the other hand, if you have nothing other than, "but it was
supposed to be 1%", then I would think not.
Why the big concern? Already late or believe it's likely?
And if they are late, do you think they will be late by 30
days once, or default and it will take 2 years to resolve?
On 09/25/2015 6:41 PM, firstname.lastname@example.org wrote:
Well, perhaps it is a typo but it's what the contract says.
Basically I agree w/ trader; if the contract is in default by over 30
day and the payor isn't amenable to the desired interpretation of the
payee your only recourse would be a legal one.
He outlined possible ways one might make an argument; that it's
unusually low as written I'd guess isn't likely to be a particularly
strong argument, particularly as it appears this was familial contract
in nature it might be construed as being done that way on purpose so as
to not be punitive.
I'd presume if the contract is in default it's probably unlikely you'd
collect on the owed amount even if it said 1%; over $1K/mo is a pretty
steep hit on a lot of folks if they didn't have the wherewithal to
simply make the settlement on time.
That's addressing only the immediate question asked, of course, which is
possibly a minor one in regards the larger picture.
I noted elsewhere the recommendation to amend the agreement to be
consonant with IRS rules; on reflection if it is the intent to avoid
such issues I think the borrower could possibly do so on own in good
faith by documenting the applicable AFR rate at the time the agreement
was entered into and paying at least that rate of interest to the lendor
from the period of the loan. Keeping records of that and notifying in
writing the lendor of that intention would, I think, be sufficient
documentation as to satisfy IRS.
Again, of course, getting an expert opinion would be the ticket here...
On 09/25/2015 6:41 PM, email@example.com wrote:
While I didn't mention it before, there's potentially a whole lot more
going on here that could have significant ramifications going forward...
If a lender chooses not charge a family member a rate of interest at
least equal to or above the appropriate Applicable Federal Rate in
effect at the time a family loan is made, the IRS may impute the
interest by taxing the lender on the difference between the Applicable
Federal Rate and the interest rate the lender actually charged.
See IRC Sec. 7872(a) & 7872(e) & 7872(f)(2)
In addition to holding the lender responsible for the taxable imputed
interest, the IRS also assumes that since the borrower did not make the
required interest payments, the lender is considered to have gifted the
Borrower the money to pay the interest that was due.
See IRC Sec. 7872(f)(3)
Furthermore, if the interest is not charged/paid and the borrower
defaults, it's possible the IRS could classify the intended loan not as
a loan but as a gift. The IRS’ annual gift exclusion permits a taxpayer
to gift up to $14,000 annually to each and every family member without
penalty. But any gifting more than $14,000 from an individual donor in
the calendar year, that donor must file a gift tax return. See IRS
Publication 559. Thus a loan that the IRS considers a gift could also
have significant effects on the lender’s life-time gift and estate tax
exemptions. Likewise, if the borrower is unable to repay the loan and
the lender wishes to deduct the loss from their income taxes,
documentation showing that the loan was legitimate could be critical.
Reading into the agreement with the specific mention of receipt of
future inheritance, perhaps there was an implicit expectation of not
full repayment of principal at all with the understanding that it would
be, in essence, a gift with only a nominal repayment.
It's not clear from the posting who's upset with the status; the
borrower or the lendor, but I'd think it should be ammended to at least
meet the minimum IRS rules in order to not trigger the possible other
potentially even larger ramifications outlined above.
As have and others have too, need to get some expert input here on how
to best proceed to clean up the current situation that have created.
I will note something somewhat similar to this without the initial note
came up in a situation with which was directly involved and it ended up
with exactly the problem of monies which had been appropriated being
deemed as future inheritance, that value recharacterized as a loan and
the interest thereupon imputed upon the "lendor" whose assets had been
misused as the least punitive overall solution. A strict legal solution
with all possible remedies sought could have gotten _very_ ugly; one
would hope such could be avoided here as well.
On 9/25/2015 1:54 PM, firstname.lastname@example.org wrote:
It clearly states ".01% per month". So, $11.50.
1% of 115K would be 1.15K so 0.01% is .0115K or 11.50$
I would question what is meant by "per month". Is a month a calendar
month? Or, "30 days"? Does "per month" mean "per month or fraction
thereof"? I.e., are 33 days considered to be 2 months? Or 1.1 months
(the ".1 month" being those extra 3 days beyond the 30).
Why isn't a lawyer involved? You're not talking "pocket change"...
Of course, the best thing for the Borrower to do would be to check with an
attorney in the State where the contract was made (or where the property
that was sold is located). Same for the Lender. Each has his/her/its own
legal rights in this matter.
The document itself (from the part that we can see so far) is poorly and
ambiguously worded. It may make a difference who prepared the document. In
some states, if a contract is ambiguous or confusing as to its meaning and
interpretation, the ambiguity falls in favor of the person who was not the
drafter of the contract.
The .01% as written does mean a "late fee" of $11.50 per month. Whatever
amount the "late fee" is eventually determined to be, it does not say that
the late fee becomes part of or is added to the amount of principal due.
If the lender wants his/her/its money, he/she/it probably should not worry
about the amount of the "late fee". Instead, it would probably make sense
to sue for the amount due immediately. One problem is that if the borrower
no longer has the money, and now has no real assets or income, the borrower
may end up declaring bankruptcy and not be required to pay the alleged debt.
The subject heading says "secured promissory note" but it may not be a
secured debt. It may be an unsecured debt that could be discharged in a
bankruptcy filing by the borrower. The claim that it is "secured" by being
an advance on a (possible) future inheritance seems unlikely to me. To me,
secured means secured by real estate or other existing tangible property or
assets, not a contingent possible future gain or inheritance.
Possibly, the lender could have created a mortgage on the property that was
about to be sold and used that as the secured loan. Then, for the property
to have been sold, the lender's mortgage would had to have been paid off
before the sale could be completed.
I'm sure there's a larger story here, and without knowing all of the facts
and circumstances surrounding this deal/arrangement, it would be hard to
know what rights and obligations each party has now.
On Saturday, September 26, 2015 at 10:44:13 AM UTC-4, TomR wrote:
It says any amounts not repaid by the *sale of the above referenced
property* will be construed as an advance on the future estate, so
apparently there is a piece of real estate. I would agree that
whether they actually have a lien placed on it is of vital importance.
Without a lien, it's not really secured.
The document says,
"Any amounts not repaid to Mercedes Hansen, from the sale of the
above-referenced real property in San Pedro, CA, shall be construed as an
advance on Lyn Hansen's future inheritance from the estate of Mercedes
The future "estate" of Mercedes Hansen does not mean that Mercedes Hansen
now owns, or will own at the time of her demise, any real estate. An estate
can be cash in the bank, a car, or any other assets and does not have to be
real estate. But, my guess is that Mercedes Hansen may well own real estate
now or in the future.
But, not of that means that the wording, ".... shall be construed as an
advance on Lyn Hansen's future inheritance from the estate of Mercedes
Hansen." constitutes a lien on the estate or a lien on any real property in
the estate of Mercedes Hansen.
It appears that the parties co-mingled the language regarding the sale of
"the above-referenced real property" and the alleged obligation of Lyn
Hansen to pay the proceeds of the sale to Mercedes Hansen with whatever
language may or may not be in Mercedes Hansen's will or the disposal of her
estate upon her death. Those two things do not belong in the same
agreement, in my opinion.
On Saturday, September 26, 2015 at 11:40:45 AM UTC-4, TomR wrote:
Never said it did. But the "any amounts not repaid from the sale of the
above-referenced real property" and the fact that it says it's a "secured
note", would mean that it's likely intended to be secured by that property.
The OP can weigh in. The estate is an issue beyond that.
Okay, got it.
You're right, the OP would have to weigh in with more info. I was thinking
that the property was already sold and the question came up about the
proceeds from the sale not yet having been used to pay Mercedes Hansen.
But, that may not be the case.
If it was a secured note that was to be secured by the property, it should
have been recorded as a mortgage lien against the property so that when the
property was sold the mortgage would be paid to Mercedes at the closing.
All that comes home to roost when folks try to "lawyer up" on their
own...not that lawyers don't make mistakes, typographical or otherwise,
but one generally has a better chance't of things being tied down as
intended if at least get an opinion on a proposed contract prior to its
It would seem the property referenced must have been sold; else't the
clause in question would still at this point be moot as it is only
triggered by the closing of the referenced transaction plus 30 days.
Hence, one must presume closing did occur and 30 days have passed and
voila! no check arrived in the mail. :)
Reading between and construing possible intent from the wording and the
reference explicitly to a future interest in an estate, as outlined in
my other follow up it makes me wonder if the whole elaborate document
wasn't drawn up as a ploy to make a gift appear as a loan for IRS
purposes. See the concerns raised in that other posting for where they
may have "issues" if not resolved and at least nominal interest is paid
in recharacterizing the loan as a gift and ramifications that might have
on both the future estate and the "lendor's" current tax liability in
imputed interest owed but not collected.
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