Promissory Notes

This update addresses various issues regarding the legal status and enforceability of security documentation and promissory notes when provided by a Paraguayan borrower in favour of foreign lenders. The two major issues that a foreign lender must consider when financing projects or operations in Paraguay are (i) the effectiveness of a given type of security instrument, and (ii) the legal actions available to the creditor to enforce a given security instrument or promissory note.


Guarantees are classified as real guarantees (on property) and personal guarantees.

Real guarantees, mainly mortgages and chattel mortgages, are considered the most reliable and secure guarantees, for they create a privileged security interest over the mortgaged or pledged property in favour of the creditor. Furthermore, procedural law prescribes an expedited enforcement procedure for this type of guarantee which is not available with respect to personal guarantees.

Mortgages are placed on real property and, provided that they are deemed to be joined to the property, extend to all improvements, buildings erected in vacant land, rents and results from insurance cover. Mortgages are not divisible and properties mortgaged to secure debts are bound for the whole amount. The creditor may proceed against any or all of them. Only the owner may mortgage his or her property. A joint owner may mortgage his or share, but in case of partition the mortgage is applied to his or her share alone.

Mortgages are made by notarial act (public deed) or public instrument, which may be executed in a foreign country but must be legalized and formalized by order of a civil court. They can be opposed by third parties from the date of recording in the public registry of properties.

The credit guaranteed by a mortgage may be divided into instalments and documented in endorsable promissory notes. It must be registered with the public deed in the same registry. Credit may be solely enforced by presenting the registered promissory notes to the court.

Mortgages may also be 'open', that is, covering all the present and future credits up to a determined amount. Generally, this type of mortgage is generally used by financial institutions and is granted for a term of between 10 and 20 years.

Mortgages are realized through an expedited enforcement procedure established by the Civil Procedure Code. Very few defences are allowed. In bankruptcy proceedings the creditor has the privilege over the mortgaged property.

Chattel mortgages
Only one type of chattel mortgage (registered pledge) is recognized by law, that is, a recorded or registered pledge over movables instituted by law. It is a contract by which the debtor assigns assets in guaranty of a loan without losing possession of them. The contract is registered and gives the creditor a privilege of those assets over other creditors, as from the date of the recording. The debtor may not execute any subsequent pledge affecting the same property, except with the creditor's consent.

Similarly to the mortgages, chattel mortgages may be open. A promissory note must be executed for each credit granted.

Chattel mortgages may be made by a private instrument or public deed, and are realized through an expedited enforcement procedure established by the Civil Procedure Code. Few defences are available to the defendant.

In bankruptcy proceedings the creditor has a privilege over the mortgaged movable property. Only certain legal privileges such as workers' salaries, compensations and legal fees, have privilege over that granted by a chattel mortgage.

Possessory pledges
Possessory pledges involve a contract through which the debtor assigns assets and physically delivers the pledged goods to the creditor in guaranty of a loan, losing possession of them. Pledged goods must be movable property.

In bankruptcy proceedings the creditor has a privilege over the pledged goods. Only certain legal privileges, such as workers' salaries, compensations and legal fees, have privilege over that granted by a chattel mortgage.

According to Paraguayan law, the pledgee may not gain appropriation of the goods. Judicial foreclosure and sale of the goods is necessary, and only if no bidders concur may the pledgor obtain appropriation for 75% of the value of the debt.

As for mortgages and chattel mortgages, possessory pledges are realized through an expedited enforcement procedure established by the Civil Procedure Code and few defences are allowed.

Pledges over securities
Securities may be pledged so that the creditor for whose benefit the pledge is established may demand satisfaction out of the pledged securities.

If the pledged security is non-negotiable through endorsement then the possession of the security shall be transferred to the pledgee, or to a third party in escrow. Securities that are neither made in writing nor assignable may not be pledged.

A pledge over bearer shares shall follow the rules instituted for possessory pledges, while the pledge over registered or other types of securities is created upon delivery of the securities through an endorsement or on the basis of a written pledge contract.

Pledges over securities are realized through an expedited enforcement procedure established by the Civil Procedure Code and very few defences are allowed.

Personal guarantees
Personal accessory guarantees are civil contracts by which a natural or legal person undertakes to honour a debt in case the principal obligor defaults in the payment.

A personal guarantee does not assign or grant any security interest over specific property. The guarantee of the debt comprises all of the debtor's assets; however, the guarantor is not legally precluded from disposing of part or all of the assets.

A guarantee must be enforced through a full trial procedure that may last for years. Attachment is usually not granted at the outset in this procedure.

In bankruptcy proceedings personal guarantees rank last after mortgages, pledges and other privileged credits.

Promissory Notes

When it is impossible to obtain a mortgage or chattel mortgage, the execution of a promissory note drafted in compliance with the applicable legal formalities is recommended.

A promissory note is considered in law to be an enforceable title. Thus, creditors may benefit from the expedited enforcement procedure established in the Civil Procedure Code that simultaneously permits immediate attachment over the debtor's assets.

Increasingly, foreign firms are preconditioning loans and shipments upon the receipt of a short-form note, in the amount of the financing plus accessory charges.

Notes are seldom subject to challenge in bankruptcy proceedings.

Notes must be drafted in accordance with Paraguayan civil and commercial law. The Civil Code adopts the continental system with respect to credit instruments. The principles that govern the formalities and validity of notes are literalness, autonomy and irrevocability of title.

A note drafted in accordance with Paraguayan law is a very simple draft or unconditional obligation to pay, as opposed to the promissory notes of countries such as the United States.

Notes may be executed by the principal debtor and by other co-debtors that are jointly and severally liable with the principal obligor.


In conclusion, taking into account legal and practical considerations, the ranking of guarantee devices from most to least secure is as follows:

  • mortgages;
  • chattel mortgages;
  • promissory notes evidencing the debt; and
  • personal guarantees.

For further information on this topic please contact M Yolanda Pereira Z or Luis Breuer at Berkemeyer Attorneys and Counselors by telephone (+595 21 446706) or by fax (+595 21 449694) or by e-mail ([email protected] or [email protected]). The Berkemeyer Attorneys and Counselors web site can be accessed at

The materials contained on this web site are for general information purposes only and are subject to the disclaimer.