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What Is an IOU?

There are many financial transactions that occur regularly and in what would be consider a casual situation that putting a legal contract to mark the transaction would be considered as a little too much. For these kinds of informal transactions, an IOU system is preferred by more people. An IOU is actually just an informal way of acknowledging a small amount of debt. This is usually accepted between friends, family, or co workers. For example, an office worker who borrows some money from another officemate can write an IOU for the debt.

The term IOU is actually just a phonetic spelling of the phrase “I Owe You”. Usually, when writing a note to signify the debt, the borrower would often write “I owe you …” but because of frequent usage it has been shortened to IOU. Even though the origin of the term is in English, other countries actually recognize the term IOU and know what it means.

It should be noted that an IOU is not similar to a formal promissory note or other financial contract. An IOU is so informal that a witness is not even needed when drafting it. Additionally, the schedule or obligations on how to pay the debt may not be indicated directly in the IOU note. Because of this, using or enforcing an IOU in court will not be easy because not only is it not notarized, the borrower may even deny the IOU. IOU notes usually involve such small amounts of money that any legal actions to collect the money may even be detrimental and cost more than the actual debt itself.

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