There are two ways to cash a promissory note: collect the money from the borrower, or sell the note to a third-party buyer for a discounted lump sum. Collecting pays full value but takes time and depends on the borrower’s cooperation. Selling pays less than face value but puts cash in your hands now. Which path makes sense depends on whether the note is current or in default, whether it is secured by collateral, and how long you are willing to wait.
What You Need Before You Can Collect or Sell
Start with the original signed note. Under the Uniform Commercial Code, the person entitled to enforce a note is generally the holder, and that means physical possession of the original instrument.1Cornell Law Institute. UCC 3-301 Person Entitled to Enforce Instrument A photocopy or scan is not the same thing. If the original has been lost or destroyed, you can still pursue collection, but you will need to establish your right to enforce through a court proceeding, typically by filing a lost-note affidavit that details the terms and explains how possession was lost.
Identify the type of note you hold. A note with a maturity date comes due on a specific day. A demand note has no fixed end date and becomes payable whenever you formally request payment. The distinction controls when your right to collect begins and when your legal deadlines start running.
If the note is secured, pull the security agreement that ties the borrower’s property to the debt.2Cornell Law School. UCC 9-203 Attachment and Enforceability of Security Interest For real estate, that means a deed of trust or mortgage. Those records establish your right to go after the collateral if the borrower does not pay.
Confirm the borrower’s current mailing address. A formal demand has to be delivered, and any lawsuit requires proper service.
Calculate What the Note Is Worth Today
Add the unpaid principal to all accrued interest. The note itself should tell you whether interest compounds annually or monthly and whether it is calculated on a 360-day or 365-day year. Those conventions change the daily interest figure slightly, so follow the method the note specifies.
Add any late fees or penalties the note allows. These are commonly a flat dollar amount or a percentage of the missed installment, often around 5%, though states cap what you can charge. Check the interest rate against your state’s usury limit as well. Some states cap consumer-loan rates as low as 5% or 6%; others allow whatever the parties agreed to in writing. A rate above the state limit can make the note partially or entirely unenforceable, which weakens your position before you even make a demand.
Put it all into a payoff ledger: original principal, every payment received with dates, the running interest calculation, and any assessed fees. If the borrower disputes the number, this is your proof.
Collecting Directly From the Borrower
Making a Formal Demand
Presentment is the step of formally asking for payment. The UCC allows presentment by any commercially reasonable method, including oral, written, or electronic, as long as it reaches the party obligated to pay.3Cornell Law Institute. UCC 3-501 Presentment If the note names a specific place of payment, such as a particular bank, presentment must happen there.
Send a written demand by certified mail with return receipt. That gives you proof the borrower received it, which matters if the case goes to court. The letter should set out:
- The total amount owed, with principal, accrued interest, and any late fees broken out to match your ledger.
- A payment deadline, typically 10 to 30 days from receipt.
- How you want the money delivered, such as wire transfer or cashier’s check.
- What you will do if payment does not arrive, such as accelerating the full balance or filing suit.
Keep every copy, including the certified mail receipt and the signed green card.
Watch Out for “Payment in Full” Checks
If the borrower sends a check for less than you claim is owed and writes “payment in full” or “full satisfaction” on it, do not deposit it reflexively. Under the UCC’s accord-and-satisfaction rules, cashing a check the borrower clearly intended as a full settlement of a disputed amount can discharge the entire remaining debt. If you receive a check with that language and you disagree with the amount, return it and demand the correct balance in writing.
Accepting a partial payment in good faith is different and generally does not waive your right to the rest, provided the note says so and nothing on the check suggests settlement. Record the payment on your ledger right away and send the borrower a written acknowledgment showing the remaining balance.p>
What to Do When the Borrower Pays in Full
Once the note is paid off, surrender it. You can discharge the obligation by returning the original instrument, destroying it, or writing “Paid in Full” across the face and signing it.4Cornell Law Institute. UCC 3-604 Discharge by Cancellation or Renunciation Marking it paid, signing, and handing it back is the cleanest approach because it gives the borrower a receipt and removes any risk that the note could be presented for payment again.
If the note was secured by real estate, file a release of lien or satisfaction of mortgage with the land records office in the county where the property sits. Skipping that step leaves a cloud on the borrower’s title and can create liability for you.
When the Borrower Will Not Pay
Acceleration
Installment notes often include an acceleration clause that lets you declare the entire remaining balance due immediately after a missed payment. Most notes, and many state laws, require you to send a notice of default first, identifying the missed payment and giving the borrower a window to cure it, often 15 to 30 days. If the borrower does not catch up, you can accelerate the balance and pursue the full amount.
Filing Suit
A breach-of-contract lawsuit is the primary remedy against a borrower who ignores a demand. Promissory note cases often move quickly on summary judgment because the promise to pay is in writing and the math is straightforward. A judgment in your favor covers the unpaid balance, accrued interest, and, if the note includes an attorney-fee clause, your legal costs.
Judgments open up enforcement tools: wage garnishment, bank levies, and property liens. For a secured note, you can foreclose on the collateral. The foreclosure process varies by state, with some requiring a judicial proceeding and others allowing a non-judicial sale.
How Long You Have to Sue
Every note has a statute of limitations. Under the UCC’s default framework, you have six years from the due date to sue on a note payable at a definite time.5Legal Information Institute. UCC 3-118 Statute of Limitations If you accelerate the balance, the six-year clock runs from the accelerated due date.
Demand notes work differently. Once you make a formal demand, you have six years from that demand to sue. If you never demand payment and no principal or interest has been paid for a continuous period of 10 years, enforcement is barred entirely.5Legal Information Institute. UCC 3-118 Statute of Limitations Individual states can set their own periods, running roughly from 3 to 20 years for written instruments. Once the deadline passes, the borrower can raise it as a complete defense and the court will dismiss. Do not sit on an unpaid note.
Selling the Note for a Lump Sum
If waiting is not an option, you can sell the note to a private investor or note-buying company. The buyer steps into your place and collects the remaining payments.
Endorsing the Note
The transfer starts with an endorsement. You sign the back of the original note, similar to endorsing a check, and that transfers your rights as holder to the buyer.6Cornell Law Institute. UCC 3-204 Endorsement The signature should be clean and legible so the chain of ownership stays easy to follow.
Transferring Real Estate Collateral
If the note is backed by real estate, the endorsement alone does not move the lien. You also need to sign an assignment of mortgage or assignment of deed of trust transferring your security interest to the buyer. That document gets notarized and recorded in the county land records where the property is located. Recording fees are generally modest and vary by jurisdiction.
Expect a Discount
Note buyers almost never pay face value. They are buying a future income stream and taking on default risk, so they apply a discount. Price depends on the borrower’s creditworthiness, the interest rate on the note, how much term is left, whether collateral exists, and the quality of that collateral. A real-estate-secured note from a strong borrower sells at a smaller discount; an unsecured note from a weak borrower sells for substantially less.
Both sides sign a note purchase agreement setting the lump sum. Once executed, the buyer wires funds and you deliver the original note along with the supporting documents: payoff ledger, security agreement, and recorded assignment.
Sell “Without Recourse”
Add the words “without recourse” to your endorsement. That tells the world you are not guaranteeing the borrower will actually pay. If the borrower later defaults, the buyer cannot come back to you for the money.7Cornell Law Institute. UCC 3-415 Obligation of Indorser Without that language, the default endorsement rules make you secondarily liable, and the buyer can demand payment from you if the borrower fails to pay. Most sellers insist on it.
Mortgage Notes: Notify the Borrower
If the note is secured by a residential mortgage, federal law requires both the outgoing and incoming servicers to notify the borrower of the transfer. You must send a transfer notice at least 15 days before the effective date, and the buyer must send one no later than 15 days after.8eCFR. 12 CFR 1024.33 Mortgage Servicing Transfers The notices must tell the borrower where to send future payments, give contact information for both servicers, and confirm the loan terms have not changed. The two sides can agree to send a single combined notice at least 15 days before the transfer date.
Taxes on What You Collect or Sell
Interest you receive on a promissory note is taxable income. If you pay $10 or more in interest to a note holder during the year, you generally must file a Form 1099-INT reporting it to the IRS.9Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID On private loans between individuals a 1099-INT often is not issued, but the recipient still has to report the interest.
Selling the note is a disposition of an installment obligation. Your gain or loss is the difference between what the buyer pays and your basis, where basis equals the unpaid balance minus the unrealized profit you have not yet reported as income.10Internal Revenue Service. Publication 537 (2025) Installment Sales The character of the gain, ordinary or capital, matches the character of the original sale that produced the note.
If you had been reporting payments under the installment method, selling the note triggers recognition of the remaining gain. You report the disposition on Form 6252, with the gain flowing to Schedule D or Form 4797 depending on the type of property originally sold.10Internal Revenue Service. Publication 537 (2025) Installment Sales Because the tax treatment turns on the underlying transaction, run the numbers past a tax professional before you sell.
One Note on Debt Collection Rules
If you are the original lender collecting your own note, the federal Fair Debt Collection Practices Act does not apply to you. The FDCPA defines a debt collector as someone whose principal business is collecting debts owed to others.11Office of the Law Revision Counsel. 15 USC 1692a Definitions As the original creditor, you fall outside that definition. State consumer-protection laws may still reach original creditors, and aggressive tactics play badly in front of a judge or jury, so the practical standard is to collect the way a reasonable third-party collector would.