People have been making "handshake" agreements for centuries, and in many cases, oral agreements are as valid as written contracts. California law is typical in providing that any contract may be oral except those that the law specifically requires to be in writing.
Generally you don't need to put a loan agreement between individuals into writing. Verbal loan agreements that are sufficiently detailed are fully enforceable. The biggest issue with enforcing oral contracts is proving their existence and terms.
Enforceable Loan Contract
To be enforceable, an oral contract must be an agreement between two competent adults, and characterized by an offer and acceptance. The terms of the contract must be definite enough that a court can enforce them, and the contract cannot have an illegal purpose.
Collecting on a Verbal Agreement
When the set time period passes and the person you lent money to doesn't pay, find out what is going on. Try calling him or setting up a meeting. If he doesn't have the funds to repay you now, propose a new, written agreement for repayment that gives him more time to pay. This makes it easier to prove the terms of the agreement if you end up going to court. Alternatively, you might agree to accept loan repayment out of some money he is certain to get in the future, like a lawsuit settlement he's waiting on or a pending inheritance.
If the person avoids your call, send him a letter reminding him of the loan, setting out the terms of your verbal agreement and asking him to pay. This type of demand letter is an essential prerequisite for taking the debt to small claims court in some states. Even if he doesn't respond, it serves as evidence of the terms of your agreement. If he doesn't respond in a few weeks, consider a lawsuit.
Getting a Judgment
Assuming that the amount is within the statutory limit for small claims court in your state, getting a small claims court judgment is an attractive option. It's fast, informal and inexpensive. Fill out the complaint form and get someone at least 18 years old t_o_ hand your debtor the papers.
To prepare for the court hearing, pull together all of the evidence you have, including cash withdrawal slips, checks written to your friend, any notes you kept about the loan or voice mail messages he left you and the letter you sent him seeking repayment. If anyone witnessed the loan agreement, bring that person to court as a witness. If you convince the judge of the existence of the agreement and that the debtor failed to pay, he likely will give you a judgment for the amount, plus interest.
Enforcing the Judgment
Once you have a judgment, the debtor may pay up. If not, you can pursue repayment in any way judgments are enforced in your state.
In most states, you can collect a money judgment by using wage garnishment -- an order from the court requiring the debtor's employer to withhold money from his paycheck every month to pay directly to you. You can also get a court order to attach, or levy, the debtor's bank or stock accounts or file a judgment lien against his real estate holdings.
Read More: How to Enforce a Judgment
If the amount you lent is greater than the small claims maximum in your state, consider your chances of getting the debtor to pay a judgment before filing a municipal or superior court case. These cases are much more expensive and time-consuming than small claims court proceedings. If the debtor is a deadbeat without a job or assets, it may not be worthwhile to sue.
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.