Perhaps at one point or another you have found yourself in a situation where a business partner, friend or acquaintance asks you to lend some money. Setting aside the wisdom of granting personal loans at all, and assuming that you do wish to help, you had better know what you are getting into and have the proper documentation in place before you transfer the money.
What happens if the borrower defaults? There are generally only two reasons why someone does not pay their debt. Either they do not want to do so, or they cannot. If the problem is one of not wanting, and assuming that they have exigible assets, you may wish to compel them to pay their debt by taking them to court. In a nutshell, the legal process entails making a claim in court, then the court must render a judgment in your favor, and you must seek the assistance of a bailiff to collect the debt.
What about interest payments? If you have a sensible loan agreement, it should at a minimum state what the principal is and the manner and frequency of payment required, as well as call for interest to be payable upon the debt at a specific rate, setting interest calculation details. It is sensible to take some care in fashioning the method of calculation of interest. Is interest calculated annually, or monthly? Is it compounded?
Perhaps for one reason or another, your loan documentation is silent on the question of interest. If the documentation is governed by Latvian law, then the Civil Law may apply a statutory rate of interest of 6 percent per annum. This is a rather clumsy instrument, as it is not particularly sensitive to the vagaries of interest rate fluctuation, but as a stop gap measure where no interest is stipulated it might be a rather useful tool in the hands of the creditor and may perhaps even be a nasty surprise for an overly complacent defaulting borrower.
Clearly the safest approach to documentation of a loan is having a proper loan agreement together with a collateral mortgage on property. If the loan is collateralized with a mortgage, execution of judgment may be considerably easier and more efficient.
Another approach, which may be considered expensive by some, is to have the loan notarized through what is known as a "notarial act." This is a more expensive form of notary service and is the alternate to a notarization of signature only. The benefit of having it rests on the ease of collection. The downside is that the notary will charge its fee based on the size of the loan. The mere notarization of signature at the lower fee scale does not accomplish the same effect when it comes to debt collection'shence the different respective levels of fees payable to the notary. In one case you may have execution of judgment in a matter of days; in the other case, it may take years.
Yet another approach is reliance upon a promissory note to secure the loan. The content of the promissory note must be approached with care, otherwise it may prove difficult to enforce.
Court fees will be payable in enforcement proceedings, and allocation of same should be dealt with in the body of the loan documentation.
The fourth approach is to simply have an unsecured loan. If you go this route, it is usually better to insert an arbitration clause in the loan agreement setting out the manner of dispute resolution concerning the loan. This approach is not necessarily ideal, as it may, for example, take months to obtain the arbitral award you are looking for. You will still likely have to obtain an execution order, which could be difficult if the borrower is alleging procedural violations in the arbitral process, subjecting the matter to a rehearing.
Still, arbitration is usually better than having the matter heard in court, which may take many years. You may be able to get an interim order to secure the debt, but that too is not necessarily a simple matter. Stamp duties will be applicable to the interim order and the claim itself.
Loan agreement enforcement is complex, and mistakes may be costly. That is why it is best to seek legal advice from the outset, at the drafting stage, to maximize the chance of effective enforcement should a default occur.
Martins Mezinskis is an associate at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.
