How to Enforce a Promissory Note

You can loan someone money on nothing more than a handshake and a smile. If you disagree later about what you shook on, however, it's hard to prove the details of a verbal agreement. A promissory note gets the terms of the deal down in writing. If the borrower doesn't pay, it's easier to enforce the note than an unwritten contract.


With contracts, what counts is what's in writing, not what you assume you agreed to. Read over the note so that you know what your rights are. If the note includes language that the borrower must "pay to the order of [your name]" for example, you can authorize someone else, such as your spouse or your parent, to collect from the maker in your stead. You can even sell the note and let the buyer deal with collecting. Without that phrasing, you may have to enforce the note yourself.


If the borrower misses an installment, contact him in writing rather than go to court the next day. Debtors are human: he may have every intention of paying you back but fell behind or got distracted. Sending a polite letter pointing out he missed a payment works better than "Hey, deadbeat!" On the other hand, you can't wait too long to ask for repayment, either. After a few years, the statute of limitations will block you from launching a collection effort.


If your borrower tells you to get lost, or keeps breaking promises to pay, you must typically go to court. You can file in small-claims court -- the easiest, most cost-effective venue -- if the debt is under your state's small-claims limit. The maximum ranges from $3,000 to $10,000 in different states. Usually you have to file in the judicial district where the maker lives, or possibly where he signed the note. If your promissory note has a so-called "cognovit" provision, the borrower is giving up the right to defend himself in court -- if he fails to pay, a judgment can be rendered against him without trial. These cognovit provisions are not legal in all states, however -- be sure you are familiar with your own state's laws.


Before you go to court, check that the law is on your side. If the note charges higher interest than your state allows, or the borrower wasn't of sound mind when you got him to sign, the note isn't valid. If the borrower decides he can't pay and files bankruptcy, collecting anything is a long shot. One advantage to writing to the borrower before suing him is that you may be able to work out an alternative to court -- smaller payments until he gets back on his feet, for instance.

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