To enforce a promissory note, you confirm the borrower is in default under the note’s own terms, send a written demand for payment, file a breach-of-contract lawsuit if the demand is ignored, and then use post-judgment tools like wage garnishment, bank levies, and property liens to actually collect. Winning in court is only half the job. The court confirms the debt; collecting it is on you.
Start With the Note Itself
Before you send anything or file anything, read the note carefully. Its language controls what you can demand, when you can demand it, and what remedies you have.
Confirm the basics first: principal, interest rate, repayment schedule, and the maturity date when the full balance comes due. Then verify the borrower’s signature. A promissory note without the borrower’s signature is essentially unenforceable.1Legal Information Institute. UCC 3-104 Negotiable Instrument
Next, find the default clause. It should spell out exactly what counts as a breach: a single missed payment, falling behind by a set number of days, or failing to keep insurance on collateral. That clause decides when your right to act kicks in. A vague or missing default definition invites the borrower to argue they never actually broke the agreement.
The Acceleration Clause
This is the single most important provision for enforcement. Without an acceleration clause, a missed payment only entitles you to collect that specific payment. With one, a default lets you demand the full unpaid principal plus accrued interest all at once. Most acceleration clauses do not fire automatically. You have to invoke them, 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 it upon default, and that changes your leverage completely. Also look for a clause allowing recovery of attorney’s fees and collection costs. Without one, you pay your own legal expenses even if you win, which can quietly eat most of what you recover on a smaller debt.
Check the Statute of Limitations
Every state sets a deadline for filing suit on a written contract. Miss it and the borrower can have the case thrown out no matter how clearly they owe the money. For promissory notes, the limitations period across most states falls between three and ten years, with a handful of states allowing up to fifteen. The clock usually starts from the date of the missed payment or, if you’ve accelerated, from the date the entire balance became due.
Two things can move the timeline. Some states restart the clock when the borrower makes a partial payment or acknowledges the debt in writing after default. And if you invoke acceleration, the limitations period may run from the acceleration date rather than from each missed installment. A demand letter does not pause the clock. If you’re anywhere near the deadline, talk to a lawyer 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, which some judges look for. And a serious letter sometimes prompts payment on its own.
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’re invoking an acceleration clause, say so explicitly. Give a reasonable deadline, typically fifteen to thirty days. Close by stating that you will file a lawsuit if the borrower has not paid or made arrangements by that date.
Send the letter by certified mail with return receipt requested. That receipt is your proof of delivery and goes into your evidence file. Keep a copy of everything.
Weigh a Settlement Before You Sue
If the borrower answers your letter but cannot pay in full, you face a practical decision. Litigation costs money and takes time, and a judgment does not guarantee collection. A borrower who is genuinely broke will still be broke after you win.
Settling for less than the full balance often makes sense when the borrower has limited assets, when the amount is small compared to the cost of suing, or when you just want the matter closed. Put any settlement in writing, specify that the payment is full satisfaction of the debt, and have both parties sign. One tax wrinkle: 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.3Internal Revenue Service. Form 1099-C
Filing the Lawsuit
If the demand and any settlement talks fail, the next step is a breach-of-contract suit. Assemble your evidence first: the original signed note, a record of every payment (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
Where you file depends on how much is owed. Every state has a small claims court for disputes below a dollar threshold, and those limits vary widely, from as low as $2,500 to as high as $25,000. Small claims is faster, cheaper, and usually does not require an attorney. Above that limit, you file in the general civil division of the trial court. Filing fees range 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 the court. Check yours, because filing in the wrong court can delay the case if the borrower challenges it.
Serving the Borrower
After filing, you must formally deliver the lawsuit papers to the borrower. This is called service of process, and the rules are strict. Typically a sheriff’s deputy, a licensed process server, or another court-approved method must do it. You cannot serve the papers yourself. Service fees usually run $40 to $200. If the borrower dodges service, most courts allow alternatives like 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 don’t, you can ask the court for a default judgment and win automatically.
Collecting on the Judgment
A judgment confirms the debt. It does not hand you a check.4Consumer Financial Protection Bureau. What Is a Judgment Collection is your job, and it’s often the hardest part of the whole process. 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 produces the smaller garnishment.5Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment Some states impose tighter limits. Garnishment works best when the borrower has a steady job but simply refuses to pay.
Bank Levies
A bank levy lets you seize funds directly from the borrower’s account. You get a court order, deliver it to the bank, and the bank freezes and turns over money up to the judgment amount. Effective if you know where the borrower banks, but it only captures what’s in the account when the levy hits. Borrowers who see it coming move money or keep balances low.
Property Liens
You can record a lien against the borrower’s real estate, attaching it to the property title. The lien doesn’t pay you immediately, but it must be satisfied before the borrower can sell or refinance.4Consumer Financial Protection Bureau. What Is a Judgment For a borrower who owns a home, it’s a strong long-term tool because the debt travels with the property.
Debtor’s Examination
If you don’t know what the borrower owns or where they bank, ask the court to order a debtor’s examination, sometimes called supplemental proceedings. The borrower must appear and answer questions under oath about income, bank accounts, vehicles, real estate, and other assets. Ignoring the order can bring a contempt finding. This is where most creditors get the information they need for garnishments and levies.
What You Cannot Reach
Not everything is fair game. Federal law protects Social Security benefits from garnishment to satisfy a private judgment.6Social Security Administration. SSR 79-4 – Section 207 of the Social Security Act Most states also shield a portion of home equity through a homestead exemption, plus basic personal property, retirement accounts, and disability benefits. Specific exemptions vary by state, but knowing they exist keeps you from spending money on collection efforts that will fail.
Interest and Judgment Renewal
The judgment amount is not frozen. Post-judgment interest accrues at a rate set by statute; federal court uses a rate tied to the one-year Treasury yield from the week before entry,7Office of the Law Revision Counsel. 28 USC 1961 – Interest and state courts set their own rates. Either way, the longer the borrower takes, the more they owe.
Judgments also expire. Most states give them a lifespan of five to twenty years, with ten years being the most common, and most allow renewal before expiration to restart the enforcement clock. If you win, don’t file the paperwork in a drawer. Calendar the expiration date and renew well before it lapses.
If the Borrower Files Bankruptcy
A bankruptcy filing stops enforcement immediately. The moment a Chapter 7 or Chapter 13 petition is filed, an automatic stay takes effect and halts lawsuits, garnishments, levies, and virtually every other collection action.8Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Violating the stay can lead to 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 further. However, if the note was secured by collateral, the lien on that collateral may survive the discharge, so you could still have rights against the pledged asset even though the personal obligation is gone. Bankruptcy is complex; if your borrower files, consult an attorney before doing anything else.
If You Ultimately Cannot Collect
An uncollectible personal loan can be claimed as a nonbusiness bad debt, which the IRS treats as a short-term capital loss.9Office of the Law Revision Counsel. 26 USC 166 – Bad Debts Several conditions apply.
You have to show the money was a genuine loan, not a gift. Lending with the understanding the borrower might not repay looks like a gift to the IRS, 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 reasonable collection efforts, though you don’t have to go all the way through a lawsuit if you can demonstrate a judgment would be uncollectible anyway.10Internal Revenue Service. Topic no. 453, Bad Debt Deduction
The deduction is taken in the year the debt becomes worthless, and the return must include a detailed statement describing the debt, the debtor, your collection efforts, and why you determined the debt had no remaining value.10Internal Revenue Service. Topic no. 453, Bad Debt Deduction Because the loss is short-term capital, the standard capital loss cap applies against ordinary income: $3,000 per year for most filers, with any excess carried forward.