I am unsure when to use IOUs for my business & friends' debt. Investopedia states that loan agreements are similar to IOUs but legally enforceable.

  1. If informal debt agreements carry no legal guarantee, how are they useful?

  2. When should you use a loan agreement instead of an informal debt agreement?

3 Answers 3


Are you asking in the context of running a business? Or in the context of your personal life?

In terms of personal finance, an IOU is fine to memorialize the fact that A owes B money. If A doesn't pay and you have a written IOU, a court will have no problem finding that A does in fact owe B the money. Problems arise, however, when A and B agree that the debt exists but don't agree on the specifics of the loan. If the IOU doesn't lay out the repayment terms, for example, A might object that they didn't agree to pay whatever interest B is charging or that payments are due on the 1st of the month or that they would pay $x every month or that they expected the babysitting they do to be counted as a payment in lieu of cash. A formal agreement that lays out all the terms would be preferable because it eliminates these sorts of ambiguities.

In the context of running a small business, an IOU would be... weird. In the overwhelming majority of cases, if one business wants to indicate that it owes a debt to another, they draft a loan agreement. Businesses assume that the person making the agreement and the person paying the agreement are different and if the Accounts Receivable/ Accounts Payable departments don't have a written agreement, they're not going to sign off on paying an IOU scribbled on a piece of paper. If you're running a restaurant, your regular fish supplier shows up with an order you've already paid for, and it turns out the fish isn't the usual quality, it might make sense for the supplier to give you an IOU for 20% of the cost of the order. They intend that to be something akin to "here's a discount on your next order because you're not happy". In that case, the IOU isn't a negotiable instrument that you could sell (it wouldn't generally make sense to try to sell a personal debt) or something where you could necessarily force them to write a check for the amount if you wanted to stop doing business with them. But it might make sense in the context of a cordial and ongoing business relationship between two small businesses.

  • For the personal finance case, is it possible for person A to dispute that he never signed the IOU with person B? Can person A say that his signature was forged? Oct 3, 2022 at 16:11
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    @MichaelSzer Definitely someone can claim fraud, some corroborating evidence would be good in such a situation like the record of a check drawn from your account written to the individual. These are the sorts of issues that most people choose to avoid by not lending money to friends/family/acquaintances.
    – Hart CO
    Oct 3, 2022 at 16:53
  • @MichaelSzer - Person A can always say his signature was forged regardless of the formality of the agreement. Assuming he is willing to perjure himself in court. In general with personal finance, if you have an IOU and a bank statement showing a transfer from B to A of the amount in the IOU and A can't show anything that shows he repaid the debt, you're going to have a pretty solid case. Oct 3, 2022 at 16:55
  • You seem to imply that IOU is something written, but why is it not a "formal" contract then? What's your definition of "formal"?
    – littleadv
    Oct 3, 2022 at 17:41
  • @littleadv - I am attempting to use the Investopedia definition (which seems a mite silly) which calls it a "document" so it appears to assume it is written. But given the Investopedia definition, it is a document that doesn't contain all the terms of the agreement (i.e. I owe you $x but not necessarily what payments are, what the interest rate is, etc.). I have no idea at what point Investopedia would deem a document to have enough information on it to be a loan agreement rather than an IOU. Oct 3, 2022 at 17:47

I assume that by "IOU" or "informal agreement" you mean "verbal" agreement and not agreement that's written down.

If informal debt agreements carry no legal guarantee, how are they useful?

In many countries verbal agreements are binding with very specific exceptions (e.g.: land/real-estate agreements must be in writing in most places). That means that verbal ("informal") agreements are in fact enforceable unless a specific exemption applies.

When should you use a loan agreement instead of an informal debt agreement?

Always. In order to avoid arguments about who said what and who promised what it's best to write things down.

  • How can verbal agreements be enforceable? Aren't they going to be a never-ending discussion of who said what? Oct 3, 2022 at 16:02
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    @MichaelSzer There can still be evidence of verbal agreements, e.g. third parties with knowledge of the agreement.
    – glibdud
    Oct 3, 2022 at 16:13
  • @MichaelSzer there can be evidence: for example if there's a verbal agreement about a loan - there's money moving around. There may be witnesses. There may be some other form of indirect documentation. There can be history of similar transactions. The point is that verbal contract is still a contract, even if it may be more difficult to enforce - it is enforceable.
    – littleadv
    Oct 3, 2022 at 17:31
  • @MichaelSzer keep in mind that for most states (if not all?) you need a written contract for things that are valued over $500, so in practice almost all examples of enforcement of verbal contracts are going to be small claims Judge Judy type affairs. The example in the OP, for example, would require a written contract in most states as it has to do with a persons debt.
    – eps
    Oct 3, 2022 at 19:01
  • @eps the OP didn't mention any country, and I'm not sure this is true outside the US necessarily. At least in one country I lived in anything that doesn't involve land/real estate can be a verbal contract.
    – littleadv
    Oct 3, 2022 at 19:56

In general it is technically true that some verbal contracts can be enforced, though in practice this is mostly going to involve small claims court type transactions as anything involving significant amounts of money (>$500) is required to have a written contracts in most states. In your specific example (since it deals with a person's debt) most states would require a written contract for it to be enforceable:

The statute of frauds (SOF) is a legal concept that requires certain types of contracts to be executed in writing.


A contract in which one person promises to pay the debt of another person is considered a surety, and it is subject to the statute of frauds.


  • This seems like a very US-centric answer...
    – littleadv
    Oct 3, 2022 at 19:54

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