Interest due on overpayment of loan?
 

For the financial wizards in the crowd... a loan law question.

My family had a loan against real estate from an individual. The loan was paid back in full some six months before we stopped sending payments. Much time passed before the mistake was discovered, and the party then became difficult to reach by phone. It has now been three years since the end of the payments, 3.5 years since the end of the loan. We're finally in solid contact with them and need to know what can be assumed.

Does any law cover handling of this? Without an overpayment clause, are we limited to recovery of the overpaid amount or is interest due?

It depends on the state. Many states have a statutory limit of 2 years from your awareness of damage to sue for recovery. From your post, it sounds like it.

Unless contractually agreed to, you are not entitled to interest, and you may not be able to recover. However, if the individual proves difficult, tell him you'll have your accountant send a 1099 for the overpayment (which is income to him) and he will have to file amended returns for the year(s) in which he was overpayed. It's a good bet that he didn't declare the interest income, and he might prefer paying you to dealing with IRS.

Thanks sirlance. That backs up our guesses on the matter.

Given the person's disposition, after this long we're lucky to get the balance without interest without a fight. Divided among the heirs, after taxes, I don't think fighting for interest is worth the effort. They were not receptive to the suggestion at all. :)