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Home Resources Financial How to Enforce a Promissory Note

How to Enforce a Promissory Note

It's strongly advised that you start by communicating with the person who owes you money to avoid the time and cost incurred when hiring debt collection agencies or taking them to court.

Gold Tetsola

Updated July 4, 2022 | Written by Gold Tetsola
Reviewed by Brooke Davis

The issue of enforcing a secured or an unsecured Promissory Note usually arises from the inability of a borrower to repay a lender within a specific timeline or by the maturity date of a loan. Enforcing a promissory note can be a challenging and lengthy process, so read ahead and discover steps you can take to resolve your debts appropriately.

The advice below may also help when it comes to enforcing an IOU form or your loan agreement. If you are unsure what loan agreement to use, read the following article on the differences between an IOU form, promissory note, and a loan agreement.

Enforcing a Secured Promissory Note

A secured Promissory Note allows the borrower to obtain security interest, also known as collateral, secured assets, or secured property that seeks to guarantee payment. In this instance, if they can’t make the repayments, the lender can repossess the assets included in the Promissory Note.

In other words, if the person who owes you money does not pay, you have the legal right to take their property as collateral.

Types of Properties that can be used as collateral

  • Tangible personal property: Jewellery, cars, computers and computer software, stereos, DVDs, and televisions.
  • Intangible personal property: Right to business, stocks, copyrights, trademarks, and patents.

Enforcing an Unsecured Promissory Note

An unsecured Promissory Note can often be riskier for a lender to adopt because the lender has no collateral to recover should the borrower default or go bankrupt. Although the lender is entering a more challenging environment, it is often considered favorable as it can set higher interest rates due to the associated risks.

Enforcing unsecured Promissory Notes can be a tedious experience involving time, money, and effort. Not to mention the emotional strain of taking a friend or relative to court.

If you have decided to enforce the unsecured Promissory Note, here are some steps you will need to take to recover the debt.

Speak to them in person

You should arrange to meet the person using some form of traceable contacts such as emails or chat applications. Doing this in person helps create a dialogue between both parties about how the debt can be repaid.

You may remind them that you will be taking the process further and enlisting a debt collector or arbitrator if they don’t repay you. This may hurt their credit ratings and, in turn, affect their chances of loaning money in the future. Openly communicating about the debt before informing them in writing might spring them into action!

If they are close friends or family members, it might be helpful to direct them toward a credit counselor if they are not coping with their debts.

Draft a Demand / Notice Letter

If having a conversation about the loan doesn’t result in repayments, you may need to resort to written warnings. The following two letters give the borrower a little more time to repay the amount owed while providing a clear written notice about the actions you will be taking to enforce the terms outlined in the promissory note.

The Notice Letter must include:

  • The name of the borrower
  • The date of the Promissory Note
  • The amount owed
  • The payment date/s or installment amounts

You must also include a few sentences regarding the nature of the demand in the letter. For example – “If the amount owed is not paid by the date specified, I will be taking legal action to recover the amount owed.”

Although this seems a little dramatic, it’s important to note that this letter and the follow-up letter below aim to save both parties from the cost and time it takes for debt collection services to get involved or if the matter ends up in court.

Write and send a Follow Up Letter

If there is no response from the borrower after sending the Notice Letter, you should attempt to send a Follow Up Letter.

The Follow Up Letter should include;

  • The date and nature of the previous Notice letter sent
  • Reinforcement of the details included in the last letter
  • Restatement of steps that you will take should the borrower fail to make payments to repay the loan (see above point II)

Enlisting a Professional Collection Agency

Be sure to research and compare prices to find the best deal possible. Remember that professionalism and credibility are essential factors to consider when choosing. Many collection agencies won’t charge you unless they can collect the funds, so finding the right agency is critical. Don’t forget that once you have enlisted a collection agency, there is still no guarantee they will be able to recover the funds.

The Federal Trade Commission has banned a range of agencies from participating in debt collection activities for various illegal reasons. Before you enlist an agency, ensure they are operating legitimately and working within the Fair Debt Collection Practice Act statute. Be sure they are not giving false or misleading information, using unfair or abusing means to collect a debt, or being deceptive. For more information, read this article on spotting a fake debt collector.

Filing a petition or complaint in court

If the collection agency’s efforts were ineffective, you might need to file a petition or complaint in court. Depending on the amount owed and the circumstances of the debt, the petition will most likely need to be filed at the Civil Courts in their district. You should file the case as ‘limited’ (usually less than $25,000), ‘unlimited’ (greater than $25,000), or a ‘small claims’ case depending on the amount owed and the state where the lawsuit is filed. In most cases, the petition for the enforcement of a Promissory Note will require an attorney’s signature.

How to File a Petition in Court

Each state and circumstance will differ in the application process for filing a petition of this nature. The petition must be filed in the district court where the defendant (borrower) lives. The petition is often filed under a breach of contract.

In California, for example, a breach of contract requires the following factual elements to be presented to recover damages from the borrower:

  • That both parties have agreed.
  • That the lender did everything that was required by the contract.
  • That all the conditions the borrower needed to meet were stipulated in the contract.
  • The borrower failed to do something that the contract required (for example, not pay the installments or money owed) or the borrower did something the contract prohibited (e.g. went on a holiday and did not pay the amount owed).
  • That you, the lender, were harmed by that failure, therefore breaching the contract.

If you are unsure of the evidence you will need to gather, here are some tips are written by the California Judicial Branch on how to gather evidence when going to court.

When going to court

Now that you are at the mediation stage, you have arrived at another point where you should stop and think about the relationship and the money. Since both parties have all the facts and evidence required, you have this final opportunity to try and come to a compromise by settling the case before it goes to trial.

Settling the case outside of court will be a lot cheaper and less time-consuming than taking it to trial. Think about your goals and whether gaining the money-back balances out the time and cost it will take if you do not try to settle or mediate it before taking it to trial.

Don’t forget that if you go to court, the judge may not rule in your favor, so think about it carefully. Before you continue, call your local clerk at the civil court in your district to ask about the specific rules for filing and what you will need to include in your lawsuit.

Once you have gone to trial and a judgment is made, if the court has ruled in your favor, a local sheriff may enforce the ruling by visiting the borrower in person and serving them the court ruling. However, even though the court has ruled in your favor it is still possible you may not recover the amount in full especially due to the cost of taking it to trial.

The court may also judge that if the borrower cannot pay the amount owed, they will garnish their salary and their employer will deduct the amount owed either in installments or upfront.

Recovering Costs

As a lender (the creditor), you may be entitled to recover some of the costs of filing the lawsuit. Decided by the courts, these may be included in ‘damages’ repaid, including interest, attorney fees, and court costs. Additionally, if you are considering representing yourself in court, read this article to ensure you’re prepared to achieve the best possible result.

Selling the Promissory Note

If you’ve exhausted all other options and can still not retrieve the debt, you may need to sell the Promissory Note to a vendor. Keep in mind that you will not get the total value of the note (usually around 60-90% of the value), so this is your last option. It’s important to remember that should you choose to sell the note; your loss will be significant as vendors that buy these promissory notes often purchase them at a great deal less than the value of the loan, leaving you with very little at the end of the process.

To sell the note, contact various buyers and try to find the best deal. You can always negotiate on price, just like any other product or service sale. However, be careful! Ensure you are selling the note to an established company with the knowledge and capability to handle the sale of your note.

Final Tips

  • Be proactive, firm, yet reasonable when dealing with the borrower
  • Always maintain a paper trail of all conversations and payments
  • Do your research and be careful when dealing with debt collection agencies
  • Check with your small local claims or civil courts about documents needed

In Summary

Enforcing a Promissory Note can be challenging, especially when dealing with a friend or family member. It is strongly advised that you start by communicating with them to try and avoid the time and cost incurred when hiring debt collection agencies or taking them to court. If you are still trying to negotiate with a friend and family member about repaying their loan and have not reached the stages above, read our article on steps you can take to legally get your money back from a friend.

Gold Tetsola

Gold Tetsola

Personal & Family Editor

Gold Tetsola is a staff writer at LegalTemplates, his BA in English Literature & Language inspires him to navigate and simplify the complex issues of personal and family law.

Related Articles

  • What’s the difference between an IOU, a Promissory Note, and a Loan Agreement?
  • How to collect debt: What to do when someone owes you money
  • Types of Promissory Notes
  • What Is a Promissory Note? Definition & What It’s Used For
  • The Complete Guide To Family Loan Agreements

In This Article

  • Enforcing a Secured Promissory Note
  • Enforcing an Unsecured Promissory Note

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Use our promissory note template to outline the details of a loan made between two people, a borrower, and a lender.

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