How to Draft a Debt Acknowledgment and Repayment Agreement: Putting Installment Payments in Writing Instead of Relying on a Verbal Promise

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When a business partner says, "We can't pay the full amount on the due date, so we'd like to pay in installments," many companies agree on the spot through a verbal exchange alone, saying something like, "All right, JPY 100,000 a month, then." Agreeing to installment payments is not unlawful in itself, and it can be a realistic compromise that takes the other party's cash flow into account. However, if the arrangement is left as a verbal promise and never put in writing, the creditor risks being forced into a disadvantageous position later, as discrepancies over the outstanding balance arise, payment delays recur, or managing the statute of limitations becomes difficult.

In deciding whether to accept a request for installment payments, it is important to understand in advance which terms should be fixed in writing. A "debt acknowledgment and repayment agreement" (saimu shonin bensai keiyakusho) is precisely the document exchanged in such situations to make collection more certain.

The Two Roles of a Debt Acknowledgment and Repayment Agreement

As its name suggests, a debt acknowledgment and repayment agreement is a form of contract that combines two roles in a single document.

The first role is to have the other party formally acknowledge that the debt exists and the amount of the debt. Regardless of how the debt arose, whether as a sales price, a service fee, or a loan, the agreement fixes "which transaction the debt is based on and how much remains outstanding" through the other party's signature and seal. When a business relationship has continued for a long time, or partial payments or discounts have been made along the way, it is not unusual for the two parties' understanding of the balance to differ. If the amount is fixed in this document, it prevents a dispute later in which the other party says, "We never agreed to that amount."

The second role is to agree on the terms of future repayment. The agreement clearly sets out the repayment schedule, including the number of installments, the amount of each payment, the payment dates, and the bank account for transfers. Confirming the amount alone does not amount to an arrangement granting extra time for payment, so when installment payments are allowed, the two functions are included in the document as a set.

If the only aim is to change the schedule with a counterparty that is not behind on payments, a memorandum may be sufficient. With a business partner whose payments are already overdue, however, the step of first having it acknowledge the existence and amount of the debt carries significant weight.

Renewal of the Limitation Period and the Risks of a Verbal Promise

When negotiating installment payments, the creditor also needs to keep an eye on managing the statute of limitations. Article 152 of the Civil Code provides that when a right is acknowledged, the limitation period begins to run anew from that time. A debtor's act of signing a document acknowledging that "this is the outstanding balance, and we will pay it in installments" constitutes such an acknowledgment. Therefore, even for accounts receivable whose limitation period is about to expire, the creditor can restart the limitation period from zero by concluding a debt acknowledgment and repayment agreement. There is also case law on acknowledgments made after the limitation period has run. In a Grand Bench judgment of April 20, 1966, the Supreme Court held that a debtor who acknowledges a debt after the limitation period has been completed cannot, under the principle of good faith, thereafter invoke the completed extinctive prescription, even if the debtor did not know that the period had been completed.

On the other hand, even at a stage where the debtor has merely asked orally, "Please let us pay in installments," there is room for that request to be assessed as an acknowledgment, since it presupposes that the debt exists. However, if the only record is an exchange by telephone or in a meeting, it becomes difficult to prove the fact of acknowledgment if the other party later disputes it, saying, "We never acknowledged anything of the sort." The point at which negotiations over installment payments begin is, from the standpoint of managing the limitation period as well, the time to put the arrangement in writing without delay. The initial response to late payments in general is also covered in detail in What Is Breach of Contract? How It Differs from Non-Performance of Obligations and the Initial Response in Corporate Legal Practice.

Essential Clauses to Include in the Agreement

When drafting a debt acknowledgment and repayment agreement, include at least the following items.

First, the cause of the debt and the exact current balance. Identify which contract, concluded when, the debt is based on, and if partial payments have been made, state the fixed amount after deducting them, together with their dates and amounts. If only the amount is stated while the cause or amount remains vague, it leaves room for the other party to claim later that the debt relates to a transaction of a different nature.

Next, the specific method and dates of repayment. Specifically state the number of installments, the amount of each payment, the final due date, and the account for transfers. Rather than an expression such as "by the end of each month," it is customary to specify a particular date, such as "no later than the 25th of each month."

In addition, always include an acceleration clause so that the creditor can demand the remaining balance in a lump sum if payments stop partway through. The rate of late payment damages should also be set. If the agreement does not specify a rate, late payment damages are calculated at the statutory interest rate as of the first point in time at which the debtor became liable for the delay (Article 419, paragraph 1 of the Civil Code). Under Article 404 of the Civil Code, the statutory interest rate is a variable rate reviewed every three years, and it is 3% per annum for the period from April 1, 2026 to March 31, 2029. The parties set a contractual rate by agreement, but for obligations under a monetary loan for consumption, such as a loan, Article 4, paragraph 1 of the Interest Rate Restriction Act limits a liquidated rate of late payment damages to 1.46 times the rates in Article 1 of that Act. Stating the rate of damages in advance makes clear how much can be added to the remaining balance and claimed if payments fall behind.

When a joint and several guarantor is to be provided, attention must also be paid to the form of the contract. Article 446 of the Civil Code provides that a guarantee contract is not effective unless it is made in writing, and a guarantee made by electronic or magnetic record is treated in the same way as one made in writing. It is customary either to include a signature and seal block for the guarantor in the agreement or to prepare a separate letter of guarantee, and to obtain the guarantor's own signature and seal. In addition, a special rule applies where the guarantor is an individual and the principal obligation is a loan or similar obligation incurred for business purposes. A loan or similar obligation is an obligation incurred by receiving a loan of money or a discount of a bill. In that case, the guarantee contract is not effective unless the prospective guarantor has expressed the intention to perform the guarantee obligation in a notarial deed prepared within one month before the date of conclusion of the contract (Article 465-6, paragraph 1 of the Civil Code). That said, accounts receivable and service fees normally do not fall under this category of loan or similar obligations. Furthermore, this notarial deed requirement does not apply where the guarantor is a director of the corporation that is the principal obligor, a shareholder holding a majority of its voting rights, or a similar person (Article 465-9 of the Civil Code).

What should rather be checked when making the business partner's representative personally a joint and several guarantor is the duty to provide information. When a principal obligor asks an individual to guarantee an obligation incurred for business purposes, the principal obligor, here the business partner, must provide the guarantor with information on its assets and income and expenditure, whether it has other obligations and their performance status, and the details of any other security it has provided (Article 465-10, paragraph 1 of the Civil Code). If the creditor knew or could have known that this information was not provided, the guarantor may rescind the guarantee contract (paragraph 2 of the same Article). A representative often knows the company's financial position, but the likelihood of a dispute increases when an individual other than the representative is asked to provide a guarantee. One option is to include in the agreement a confirmation clause stating that the guarantor has received the information.

A Realistic Design for the Acceleration Clause

In an installment payment agreement, the design of the acceleration clause is, in practice, the main focus of negotiation. There are two typical approaches: one under which the debtor immediately loses the benefit of time for the entire amount if it fails to make even a single payment, and one under which the benefit of time is lost only if the debtor fails to pay two or more times in a row.

Because the other party is often struggling with cash flow, it may strongly resist a clause under which a single delay immediately triggers a lump-sum demand. On the other hand, readily accepting "two consecutive delays" effectively means tolerating two months of nonpayment, which increases the collecting party's management burden. For this reason, a design often used in practice is to provide that, as a rule, the benefit of time is lost upon a single delay, while reaching a compromise by adding a grace period: "provided, however, that this shall not apply if payment is made within [ ] days after the due date." My view is that, as one guideline, the grace period should be kept to about three days to one week, maintaining a stance that does not tolerate open-ended delays.

Criteria for Using a Notarial Deed with Compulsory Execution in View

A debt acknowledgment and repayment agreement can be prepared as a private document between the parties, but having it made into a notarial deed at a notary office makes a significant difference to the subsequent collection procedure.

If a "clause of consent to compulsory execution" is included in the notarial deed, the deed becomes an enforceable title of obligation as an execution deed (Article 22, item 5 of the Civil Execution Act). If payments stop again, the creditor does not need to file a lawsuit and obtain a judgment. After obtaining a certificate of execution from the notary and having the notarial deed served on the other party, the creditor can file a petition for attachment of assets such as the other party's bank accounts and accounts receivable (Article 26, paragraph 1 and Article 29 of the same Act). If the agreement remains a private document, the creditor cannot proceed to compulsory execution after payments fall behind without separately obtaining an enforceable title of obligation, such as by filing a lawsuit and obtaining a judgment, and in the meantime the other party's financial position may deteriorate further, making collection impossible.

The practical benefit of a notarial deed increases where the amount of the claim is large, where the installment period is long, or where there are concerns about the other party's business condition. Preparing one requires the other party's cooperation. The other party either goes to the notary office, entrusts an agent with the request, or, where the notary finds it appropriate, participates by web conference (Article 32, paragraph 1 and Article 37, paragraph 2 of the Notary Act). It is therefore realistic to present the notarial deed as a precondition for agreeing to installment payments and build it into the negotiations. The question of how far to secure terms favorable to one's own company in the contract clauses also shares the approach to allocating responsibility explained in Reviewing Damages and Limitation of Liability Clauses in Practice: How to Read Caps, Exceptions and Indirect Damages.

Initial Response to a Request for Installment Payments and Consulting a Professional

When a business partner requests installment payments, first cross-check the existing contracts, invoices, delivery notes, and payment history to determine the exact unpaid balance at present. If discussions proceed while the basis of the amount remains vague, the figures will waver when they are put into the agreement.

Then, if the company decides to accept installment payments, prepare a draft debt acknowledgment and repayment agreement that includes the acknowledgment of the debt, the repayment schedule, an acceleration clause, and late payment damages, and obtain the other party's signature and seal. When a joint and several guarantor is provided, make sure to obtain the guarantor's signature and seal, and check whether the information has been provided to an individual guarantor. Where the principal obligation is a loan or similar obligation incurred for business purposes and the guarantor is not a director or similar person of the business partner, also take the notarial deed requirement into account. Where there are concerns about the other party's finances or the amount is large, it is effective to negotiate from the outset on the condition that a notarial deed will be prepared.

The response to a request for installment payments determines the success or failure of collection not only through the decision whether to accept it but also through the document exchanged after agreement is reached. Decisions on drafting a debt acknowledgment and repayment agreement, designing its clauses, and whether to use a notarial deed require careful judgment suited to the circumstances of each transaction.