Can I Discharge a Car Note With a Bonded Promissory Note?

Every now and then, a debt consolidation agency or salesperson may come around and offer a borrower the opportunity to discharge his car loans with a bonded promissory note. This might seem like a tempting option, but bonded promissory notes are often the instrument of scams and fraud. Understanding the difference between a legitimate debt arrangement, such as a promissory note, and a potential scam is important to avoiding this kind of fraud.

Using Promissory Notes

A promissory note is a debt agreement between a borrower and a lender that constitutes the legal obligation of the borrower to pay back his loan. There are multiple configurations and payment plans associated with a promissory note, but they are generally long-term debts, sometimes secured against property, that must be paid back in regular installments with interest. In theory, a promissory note could be used to pay another debt -- federal reserve notes are actually promissory notes -- but few creditors accept them as legal tender in lieu of cash.

Bonded Promissory Note

A contract or debt is bonded if it is secured by a indemnity bond purchased by the borrower. An indemnity bond is a type of insurance policy that covers the losses of the creditor in the event that the borrower fails to make good on his obligation. Indemnity bonds are offered by a surety, or a third party that agrees to make good on the contract or note in the borrower's behalf.

Bonded Promissory Notes in Scams

Borrowers should be highly wary of anyone offering them the opportunity to discharge their car loans or any other debts with a bonded promissory note. In the past, scammers have been able to use these instruments to defraud borrowers and creditors, due to the difficulty in verifying a bond. Creditors usually do not accept bonded promissory notes as payment for a car loan, as they must be able to collect cash to fulfill the borrower's obligations. Many bonded promissory notes are not only unsecured by a bond, they're often not even legally valid documents. Those using them to try to discharge a debt can, in some cases, face criminal penalties.

Discharging Car Loans in Bankruptcy

In most cases, full payment in cash is the only viable way to discharge a car note. In some cases, the borrower is released from a car loan through the process of bankruptcy, though these situations usually require the borrower to surrender the vehicle. This is because the car loan is usually secured against the vehicle as an asset, giving the lender the right of repossession in the case of default. In Chapter 13 bankruptcy, loan discharges are generally associated with a court-ordered debt payment plan.