To enforce a promissory note, you review the note for its default and acceleration terms, send the borrower a written demand for payment, file a breach-of-contract lawsuit if the demand is ignored, and then use post-judgment tools such as wage garnishment, bank levies, and property liens to actually collect. Courts confirm the debt; they do not hand you the money. Every step depends on what the note itself says, so the work starts with the document in your hand.
Read the Note First
The note controls what you can demand, when you can demand it, and what remedies you have if the borrower refuses. Before sending any letter or filing anything, confirm the basics: principal, interest rate, payment schedule, and maturity date. Verify that the borrower signed it. A promissory note without the borrower’s signature is essentially unenforceable. Under the Uniform Commercial Code, a valid negotiable promissory note must be a signed, written, unconditional promise to pay a fixed amount of money, payable either on demand or at a definite time.1Legal Information Institute. UCC 3-104 Negotiable Instrument
Then find the default clause. It defines exactly what counts as a breach: a single missed payment, falling behind by a certain number of days, failing to insure collateral, or something else. If default is not clearly defined, expect the borrower to argue they never actually violated the agreement.
The Acceleration Clause
This is the single most important provision for enforcement. Without one, a missed payment only entitles you to collect that specific payment, not the entire remaining balance. With one, a default lets you demand the full unpaid principal plus accrued interest all at once. Most acceleration clauses do not trigger automatically. You have to invoke the clause, and if the borrower cures the default before you do, the right to accelerate can disappear.2Legal Information Institute. Acceleration Clause Once you decide to accelerate, put it in writing promptly.
Collateral and Attorney’s Fees
Check whether the note is secured. If the borrower pledged property, a vehicle, or another asset, you may have the right to claim that asset upon default. A secured note gives you real leverage because the borrower has something tangible to lose. Also look for a clause allowing recovery of attorney’s fees and collection costs. Without that language, you generally bear your own legal expenses even if you win, which can consume most of what you recover on a smaller debt.
Check the Statute of Limitations Before You Do Anything Else
Every state sets a deadline for filing suit on a written contract. Miss it and the borrower can have your case dismissed no matter how clearly they owe the money. For promissory notes, the limitation period across most states falls between three and ten years, though a handful of states allow up to fifteen. The clock usually starts from the date of the missed payment, or, if the loan has been accelerated, from the acceleration date.
Two wrinkles matter. Some states restart the clock if the borrower makes a partial payment or acknowledges the debt in writing after default. And a demand letter does not pause the clock. If you are anywhere close to the deadline, talk to an attorney before doing anything else.
Send a Demand Letter
Before filing suit, send a formal written demand. The letter puts the borrower on notice that you consider them in default and intend to pursue legal remedies. It shows a court you tried to resolve the dispute first, and it sometimes produces payment on its own once the borrower realizes you are serious.
Keep it straightforward. State the total owed, broken into principal and accrued interest. Reference the note by date and identify the provision the borrower has violated. If you are invoking the acceleration clause, say so explicitly. Give a reasonable deadline for payment, typically fifteen to thirty days. Close by stating that you will file suit if the borrower does not pay or contact you by that deadline.
Send the letter by certified mail with return receipt requested. The return receipt is your proof of delivery if the case goes to court. Keep copies of everything.
One legal note: the Fair Debt Collection Practices Act limits how third-party debt collectors can contact borrowers, but it generally does not apply to original creditors collecting their own debts.3Office of the Law Revision Counsel. 15 USC 1692a – Definitions If you made the loan yourself, you have more flexibility. Hire a collection agency and those FDCPA rules apply.
Consider Settling
If the borrower responds but cannot pay in full, you have a practical decision to make. Litigation costs money and takes time, and a judgment does not guarantee collection. A borrower who is genuinely broke will be just as broke after you win.
Settling for less than the full balance often makes sense when the borrower has few assets, when the amount is small compared to litigation costs, or when you want the matter closed. Put any settlement in writing, specify that the borrower’s payment constitutes full satisfaction of the debt, and have both parties sign. Be aware that if you forgive $600 or more, you may need to report the cancelled amount to the IRS on Form 1099-C, and the borrower may owe income tax on the forgiven portion.4Internal Revenue Service. Form 1099-C
File the Lawsuit
If demand and negotiation fail, the next step is a breach-of-contract lawsuit. Before filing, assemble your evidence: the original signed note, a record of every payment the borrower made with dates and amounts, a copy of your demand letter with proof of delivery, and the borrower’s full legal name and last known address.
Which Court to Use
The amount owed decides where you file. Every state has a small claims court for disputes below a set threshold, and those limits vary widely, from as low as $2,500 to as high as $25,000 depending on the state. Small claims courts are faster, cheaper, and usually do not require an attorney. If the amount exceeds the small claims limit, you file in the general civil division of the trial court. Filing fees run from under $100 in some jurisdictions to several hundred dollars in others.
You generally file in the county where the borrower lives or where the loan was signed. Some notes include a venue clause specifying which court has jurisdiction. Check for that language, because filing in the wrong court can delay your case if the borrower challenges it.
Serving the Borrower
After filing the complaint, you must formally deliver the lawsuit papers. Service of process has strict rules that vary by jurisdiction, but typically require delivery by a sheriff’s deputy, a licensed process server, or another court-approved method. You cannot serve the papers yourself. Service fees typically run $40 to $200. If the borrower avoids service, most courts allow alternative methods such as posting or publication, though these take longer and may require a court order.
Once served, the borrower has a set number of days to respond, usually twenty to thirty. If they do not respond, you can ask the court for a default judgment, meaning you win because the borrower failed to contest the claim.
Collect on the Judgment
A judgment confirms that the borrower owes you money. Collecting is your responsibility, and it is often the hardest part of the whole process.5Consumer Financial Protection Bureau. What Is a Judgment Several tools are available.
Wage Garnishment
A garnishment order directs the borrower’s employer to withhold part of each paycheck and send it to you. Under federal law, garnishment for ordinary debts like a promissory note cannot exceed 25 percent of the borrower’s disposable earnings, or the amount by which their weekly earnings exceed 30 times the federal minimum wage, whichever is smaller.6Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment Some states set tighter limits. Garnishment works well when the borrower has a steady job but refuses to pay voluntarily.
Bank Levies
A bank levy lets you seize funds directly from the borrower’s account. You obtain a court order, deliver it to the bank, and the bank freezes and turns over funds up to the judgment amount. This can be highly effective if you know where the borrower banks, but it only captures what is in the account when the levy hits. The borrower may have moved money or may keep minimal balances.
Property Liens
You can place a lien on the borrower’s real estate. The lien attaches to the title and does not put cash in your pocket immediately, but it must be paid before the borrower can sell or refinance.5Consumer Financial Protection Bureau. What Is a Judgment For a borrower who owns a home, this is a powerful long-term tool because the debt essentially follows the property.
Debtor’s Examination
If you do not know what the borrower owns or where they bank, you can ask the court to order a debtor’s examination, sometimes called supplemental proceedings. The borrower must appear in court or at a deposition and answer questions under oath about income, accounts, vehicles, real estate, and other assets. Ignoring the order can bring contempt of court. This is where most creditors get the information they need to pursue garnishments and levies effectively.
What You Cannot Touch
Not everything the borrower owns is fair game. Federal law protects Social Security benefits from garnishment to satisfy a private judgment.7Social Security Administration. SSR 79-4 – Section 207 of the Social Security Act Most states also shield a portion of home equity through homestead exemptions, along with basic personal property, retirement accounts, and disability benefits. The specific exemptions vary by state, but knowing they exist keeps you from spending money on collection efforts that will not succeed.
Post-Judgment Interest and Expiration
The judgment amount is not frozen. In federal court, post-judgment interest accrues at a rate tied to the weekly average one-year Treasury yield from the week before the judgment was entered.8Office of the Law Revision Counsel. 28 USC 1961 – Interest State courts set their own rates, which vary widely. Either way, the longer the borrower waits, the more they owe.
Judgments also expire. Most states give them a lifespan of five to twenty years, with ten being the most common. Many states allow renewal before expiration, which restarts the enforcement clock. Do not let a judgment sit in a drawer. Calendar the expiration and renew well before it lapses.
If the Borrower Files Bankruptcy
A bankruptcy filing can stop enforcement in its tracks. The moment the borrower files under Chapter 7 or Chapter 13, an automatic stay takes effect and halts lawsuits, wage garnishments, bank levies, and virtually every other collection action.9Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Violating the stay can bring sanctions against you, so take it seriously.
If the case ends in a discharge, the borrower’s personal liability on the note is wiped out and you cannot pursue them for the money afterward. If the note was secured by collateral, however, the lien on that collateral may survive the discharge, meaning you could still have rights to the pledged asset even though the personal obligation is gone. Bankruptcy is its own body of law. If your borrower files, consult an attorney before taking any further step.
Deducting a Loan You Cannot Collect
If collection ultimately fails, you may be able to claim a tax deduction. The IRS treats an uncollectible personal loan as a nonbusiness bad debt, deductible as a short-term capital loss.10Office of the Law Revision Counsel. 26 USC 166 – Bad Debts Several conditions apply.
The money must have been a genuine loan, not a gift. If you lent to a friend or relative with the understanding they might not repay, the IRS treats that as a gift and no deduction is available. The debt must be totally worthless. Unlike business debts, you cannot deduct a partially worthless personal loan. And you must show you took reasonable steps to collect, though going all the way through a lawsuit is not required if you can show a judgment would be uncollectible anyway.11Internal Revenue Service. Topic no. 453, Bad Debt Deduction
You can only take the deduction in the year the debt becomes worthless, and your return must include a detailed statement describing the debt, the debtor, your collection efforts, and why you concluded the debt had no remaining value.11Internal Revenue Service. Topic no. 453, Bad Debt Deduction Because a nonbusiness bad debt is treated as a short-term capital loss, the annual capital-loss limit against ordinary income applies: $3,000 per year for most filers, with any excess carried forward.