Suppose that individual A lends his money to individual B.

In order for A to be protected, what does he need to do? Is his lending protected by law?

(I would prefer to hear the general case, but if the case needs to be restricted, let us restrict the case to the U.S. case.)

If it is not protected, what are the reasons for not protecting?

  • 1
    Interesting question!
    – MrChrister
    Nov 21, 2012 at 19:31
  • 3
    I think this is a legal question, not a personal finance question. Nov 21, 2012 at 20:33
  • 2
    It's a legal and personal finance question. People often lend each other money. Nov 27, 2012 at 15:04
  • 1
    I'm voting to close this question as off-topic because this is a question of laws.
    – quid
    May 3, 2017 at 23:13
  • 1
    Individual A could always go the mafia route and threaten to break Individual B's kneecaps...
    – grfrazee
    May 4, 2017 at 13:54

3 Answers 3


By protected you mean what exactly?

In the US, generally you'd get a promissory note signed by B saying "B promises to repay A such and such amount on such and such terms". In case of default you can sue in a court of law, and the promissory note will be the evidence for your case. In case of B declaring bankruptcy, you'd submit the promissory note to the bankruptcy court to get in line with all the other creditors.

Similarly in all the rest of the world, you make a contract, you enforce the contract in courts.


For person A to be protected (meaning able to recover some or all of the money should the other party try to welsh on the deal), the two of them must have entered into a valid, binding contract where both parties acknowledge and agree to the debt and the terms. Such a contract is subject to the Statute of Frauds, a collection of laws governing contracts which is mostly borrowed from English common law.

The basics are that in all cases, a "contract" is only formed when both parties agree, technically when one party accepts an offer made by the other party. Both the offer and acceptance must be made sincerely. For a contract, once entered, to be enforceable, proof of the contract's existence and terms must itself exist. Certain types of transactions (real estate, large amounts of money) require contracts to be in written form, and witnessed by a trusted third party (in most cases this party is required to be a notary public). And contracts must have a certain amount of quid-pro-quo; contracts that provide a unilateral benefit can be thrown out on a case-by-case basis. A contract that simply states that Person B owes Person A money, without stating what benefit Person A had provided Person B in return for the money (in this case A gives B the money to begin with), is unenforceable. The benefits must of course be legal on both sides; a contract to deliver 5 tons of cocaine will not be upheld by any court in any free country, and neither will any contract attempting to enforce hush money, kickbacks, bribery etc (though some toe the line; one could argue that a signing bonus is tantamount to bribery). In some cases even seemingly benign clauses, like "escape clauses" allowing one party a "free out", can make the contract unenforceable as they could be abused to the severe detriment of one party. There are also jurisdiction-specific rules, such as limits on "finance charges" for debts not owed to a "bank" (a bar, for instance, cannot charge 10% on an outstanding tab in the United States). This is HUGE for your example, because if Person A had specified an interest rate in excess of the allowed rate for non-bank lenders, not only will the contract get thrown out even though Person B agreed to the terms, but Person A could find themselves on the hook for punitive damages payable to Person B, FAR in excess of the contracted amount.

Given that the agreement meets all tests of validity for a contract, if either party fails to perform in accordance with the contract, causing a loss or "tort" for the other party, the injured party can sue. Generally the two options are "strict performance" (the injuring party is ordered by the court to comply exactly with the terms of the contract), or payment of net actual damages and dissolution of the contract. In your example, if Person A had lent Person B money, strict performance would mean payment of the debt in the installments agreed, at the rate agreed; actual damages would be payment of the outstanding balance plus current interest charges (without any further penalty). Notice that it's "net" damages; if Person A was to issue the loan in installments, and missed one, causing Person B to suffer damages from the loss of expected cash flow directly resulting in their failure to pay according to the terms, then Person B's proven damages are subtracted from A's; very often, the plaintiff in a suit to recover money can end up owing the defendant for a prior failure to perform. There are further laws governing bankruptcy; basically, if the other person cannot satisfy the contract and cannot pay damages, they will pay what they can, and the contract is terminated with prejudice ("no blood from a turnip").

  • 1
    This is a good answer.
    – MrChrister
    Nov 26, 2012 at 17:54
  • @KeithS, what do you mean by "a certain amount of quid-pro-quo"? Isn't it the case that courts will not generally inquire into the adequacy or relative value of the consideration provided by each party? In the case of Fischer v. Union Trust Co, the courts seem to hold the consensus that 1 dollar is enough to pay for a house right?
    – Pacerier
    Dec 22, 2013 at 5:52
  • Like I said, case-by-case basis. The fundamental rule from English common law is that the contract cannot stipulate a unilateral benefit to one party. Your example is a textbook case of a "peppercorn", a "nominal consideration" paid in return for something much more valuable, making the transaction a sale (and thus able to be contractually obligated) and not a gift (legally a "naked promise").
    – KeithS
    Dec 23, 2013 at 18:32
  • However, notice that the appellate court has reversed the original decision; the contract made binding by the payment of $1 was satisfied the moment money and house changed hands; there was no further promise or guarantee enforceable by that implied sale contract, such as the promise to pay the mortgage (which was specifically mentioned in the covenant against encumbrances on the deed).
    – KeithS
    Dec 23, 2013 at 18:41
  • @KeithS, Yes the contract cannot stipulate a unilateral benefit to one party, but that party could simply give a peppercorn in return right? So what do you mean by "a certain amount of quid-pro-quo"? From what I see, a peppercorn is all that is needed to fulfil "a certain amount of quid-pro-quo".
    – Pacerier
    Dec 29, 2013 at 20:34

Yes, it is, under some circumstances (basically, a piece of paper saying "John Doe borrowed Josh Shoe 100 USD" is not enough). Usually, the paper should include:

  • specific enough personal information of both persons included (name, date of birth, address, id card number)
  • amount of money borrowed
  • way how the money is transferred (cash, cheque, bank transfer, ...), for cheque/bank transfer, the account information is encouraged
  • date of transfer
  • when the money should be repaired (this is very important); it needn't be one date, it can be a monthly payment or similar
  • signatures of both persons involved
  • for larger amount of money, it is wise to make have the signatures verified

This is the case for Czech Republic, I believe it's similar for other countries as well.

Remember that without the repair date, you have very complicated position forcing the person to give you the money back.

As well, there's a withdrawal of rights, i.e. after X years after the "repair date", you cannot force the person to give you the money. You have to send the case to the court in some period after the "repair date", if you don't have the money yet.

  • I think your answer is wrong in many cases an Oral Contract will be enforced by the courts. It is just more difficult to prove that one existed. And the that terms are defined is more important than any PII of the borrowers.
    – user4127
    Nov 26, 2012 at 18:14
  • Yes, but an oral contract must basically still include all the information but the signatures. And I would discourage everybody from "signing an oral loan contract" for more than 10 bucks borrowed to a friend.
    – yo'
    Nov 26, 2012 at 18:16
  • The question is "is it enforced". I agree you should get the info you listed for any loan you actually expect to be repaid. But it is not required it just makes it easier to prove the loan existed and the terms were agreed to.
    – user4127
    Nov 26, 2012 at 18:18
  • I know that in Czech Republic, the contract must include all the information from the first 5 points, otherwise it is invalid. The enforcement of money from an invalid contract -- way too complicated and completely unsure.
    – yo'
    Nov 26, 2012 at 18:22
  • In the US if both parties agree that there was an agreement that is enough to be held up in court. But yes if there is not admission that the agreement existed then it gets more complicated. But it can still work out.
    – user4127
    Nov 26, 2012 at 18:27

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