In this guide
1. Review Your Promissory Note or Loan Agreement
Before taking any action, locate and carefully read the promissory note, IOU, or loan agreement you have. This document is your roadmap: it outlines the amount owed, interest rate, repayment schedule, and any collateral. If you don't have a written agreement, you can still enforce an oral contract in many states, but proving the terms will be harder.
Check whether the note is 'demand' (due immediately upon request) or 'installment' (due in payments). Note the maturity date and any acceleration clauses that allow you to demand the full balance if the borrower misses a payment. Also, review any late fees or default interest provisions—they tell you what you can charge if the borrower is late.
If you can't find the original note, ask the borrower for a copy or check your email and bank records. If you have no written evidence, you may need to reconstruct the agreement from messages, canceled checks, or bank statements. This documentation will be crucial if you need to escalate.
- Identify the exact amount owed, including principal and accrued interest.
- Confirm the repayment terms and whether the borrower is in default.
- Note any security interest or collateral that secures the loan.
- Review the statute of limitations for debt collection in your state (typically 3–6 years for written contracts).
2. Send a Formal Demand Letter
A formal demand letter is a clear, written request for payment sent to the borrower. It serves as a final notice and can often prompt payment without legal action. The letter should state the amount owed, the date of the original loan, and a deadline for payment (e.g., 30 days). Mention that if payment isn't received, you will pursue legal remedies.
Send the letter via certified mail with return receipt requested so you have proof of delivery. Keep a copy for your records. This letter also demonstrates to a court that you made a good-faith effort to resolve the matter amicably, which can be favorable if you later sue.
In some states, a demand letter is required before filing a lawsuit for breach of contract. Even if not required, it often resolves the issue quickly and inexpensively. Be polite but firm; avoid threats or abusive language, as that could backfire.
- Include your name, borrower's name, the loan date, and the exact amount due.
- Specify a reasonable deadline (e.g., 14–30 days) for payment.
- State that you will take legal action if not paid, but avoid making false threats.
- Keep proof of mailing and a copy of the letter.
3. Negotiate a Repayment Plan or Settlement
If the borrower acknowledges the debt but can't pay in full, consider negotiating a repayment plan. You might agree to accept smaller monthly payments over a longer period. Put any new agreement in writing, ideally as a modification to the original promissory note or as a separate payment plan agreement.
Alternatively, you could offer a settlement: accept a lump-sum payment for less than the full amount owed, and forgive the rest. For example, you might accept $800 to settle a $1,000 debt. If you settle, get a written 'settlement agreement' that releases the borrower from further liability.
When negotiating, keep the lines of communication open. Sometimes borrowers are embarrassed and avoid contact; a compassionate approach can break the ice. However, be clear that you expect to be repaid and set firm deadlines. If the borrower stops communicating, you may need to escalate.
- Propose a realistic payment schedule based on the borrower's ability to pay.
- Get any new terms in writing and signed by both parties.
- Consider a discount for immediate payment if you need cash quickly.
- Document all communications and payments received.
4. Consider Mediation or Small Claims Court
If negotiation fails, mediation is a low-cost, non-binding process where a neutral third party helps you and the borrower reach an agreement. Many courts offer mediation services for small claims. Mediation can preserve the relationship and is faster than a lawsuit.
For debts under a certain amount (typically $5,000–$10,000, depending on your state), small claims court is a practical option. You can file a claim without a lawyer, and the process is streamlined. You'll need to bring your promissory note, demand letter, and any evidence of non-payment.
Before filing, check the filing fee and the statute of limitations. If the borrower lives in another state, you may need to file in their jurisdiction. Small claims court judgments are enforceable, but collecting can still be a challenge if the borrower has no assets or income.
- Mediation costs far less than a lawsuit and is often successful.
- Small claims court limits vary by state; check your local court's website.
- Gather all evidence: the note, emails, texts, canceled checks, and the demand letter.
- Prepare a simple timeline of events to present to the judge.
5. File a Lawsuit in Civil Court
If the amount owed exceeds the small claims limit, or if you need to attach a lien to property, you may need to file a lawsuit in civil court. This is more formal and typically requires hiring an attorney. You'll file a complaint and serve the borrower with a summons, giving them a chance to respond.
The borrower may answer, counterclaim, or ignore the lawsuit. If they don't respond, you can request a default judgment. If they respond, the case may go to trial or settle. Be prepared for a lengthy process—civil cases can take months or even years.
Before suing, weigh the costs: filing fees, attorney fees, and the time you'll spend. If the debt is small, it may not be worth it. Also, consider whether the borrower has collectible assets. A judgment is only as good as your ability to collect it. You can promissory note with a state-specific template here.
- Consult an attorney to evaluate your case and the likelihood of recovery.
- File the lawsuit in the correct jurisdiction (usually where the borrower resides).
- Serve the borrower properly according to your state's rules.
- Keep track of all deadlines and court appearances.
6. Enforce the Judgment
Winning a lawsuit doesn't automatically get you paid. If the borrower doesn't pay voluntarily, you can use legal tools to enforce the judgment. A bank levy allows you to freeze and seize funds from the borrower's bank account. A wage garnishment deducts a portion of their paycheck directly. You can also place a lien on their property, which must be paid when they sell.
To enforce a judgment, you'll need to locate the borrower's assets. You can conduct discovery by asking them to fill out a 'judgment debtor exam' form, or you can hire a private investigator. Each state has specific procedures and exemptions—for example, certain income like Social Security cannot be garnished.
Enforcement can be complex, so consider hiring an attorney or a collection agency that specializes in judgment enforcement. Remember that judgments have expiration dates (often 10 years, but renewable), so act promptly.
- Request a bank levy or wage garnishment through the court.
- File a lien on real estate or personal property.
- Conduct a judgment debtor exam to uncover assets.
- Renew the judgment before it expires if necessary.