Read the note carefully. Default typically includes:

Many notes include a cure period:

"Borrower shall have 10 days after written notice of default to cure the default before Lender may accelerate the note."

If your note has a cure period:

• Send written notice of default specifying the breach
• Wait the full cure period before taking further action
• If borrower cures within the period, default is waived
• If borrower doesn't cure, you can then accelerate

Before demanding payment, calculate the exact amount owed:

• Principal balance: Original amount minus payments made
• Accrued interest: Calculate from last payment to demand date
• Late charges: Per the note's late fee provision
• Default interest: If note provides for higher post-default rate
• Advances made: If you paid property taxes, insurance, or other costs on borrower's behalf
• Attorney fees: If already incurred and note allows recovery

Acceleration means declaring the entire unpaid balance immediately due, rather than waiting for future installments to become due.

Acceleration clause example:

"Upon default, Lender may declare the entire unpaid principal and accrued interest immediately due and payable."

Why accelerate?

• Allows you to sue for full balance now (don't have to wait for each missed payment)
• Starts statute of limitations running on entire debt
• Creates urgency for borrower to settle
• Required before foreclosing on secured notes in most states

1. Verify default occurred and any cure period has expired
2. Calculate total amount due (principal + interest + fees)
3. Send written notice of acceleration to borrower
4. State deadline for payment (typically 10-30 days)
5. Describe consequences (lawsuit, foreclosure if secured)

These are often combined in one letter:

• Notice of Default: "You failed to make the payment due on [date]"
• Notice of Acceleration: "We hereby accelerate the note and declare the entire balance of $[X] immediately due"
• Demand for Payment: "Pay $[X] by [date] or we will file suit"

• Send demand promptly after default: Delays can waive your rights or suggest you don't take default seriously
• Allow reasonable time to respond: 10-30 days is standard depending on amount
• Consider borrower's situation: If borrower is insolvent or in bankruptcy, acceleration may be futile
• Check statute of limitations: In some states, accelerating starts a new SOL clock

If the note is secured by collateral (real estate, vehicle, equipment, inventory), you have additional remedies and considerations.

Your demand letter should reference the security:

• Identify the collateral specifically
• State that you have a perfected security interest
• Warn that foreclosure/repossession will occur if not paid
• Reference the security agreement and any recorded documents

Foreclosure (secured by real estate):

• Pro: Get the property; may cover debt if property has equity
• Con: Expensive, slow (6-18 months in many states), may not cover full debt if underwater
• Some states allow deficiency judgment after foreclosure; others don't

Repossession (vehicles/equipment):

• Pro: Fast; can often repossess without court order if no breach of peace
• Con: Collateral may have depreciated; must follow UCC Article 9 sale procedures
• Can sue for deficiency after UCC sale

Sue on the note (ignore collateral):

• Pro: Faster judgment; can garnish wages/levy accounts
• Con: If borrower has no assets/income, judgment is worthless

Personal loans between friends, family members, and acquaintances are the most common, and most emotionally difficult, promissory note disputes. I handle these cases regularly and have developed a strategic approach that balances legal enforcement with relationship preservation where possible.

Many personal loans lack formal documentation. Here's what I look for to build your case:

• Text messages or emails discussing repayment: "I'll pay you back by March" is evidence of a loan, not a gift
• Partial payments made: Any repayment proves borrower acknowledged the debt
• Bank transfer records: Memo lines saying "loan" or "lend" help establish intent
• Witness testimony: Others who knew about the loan terms
• Tax returns: If either party reported interest income/expense

1. Document review: Assess what evidence exists (note, texts, bank records, witnesses)
2. Strategic demand letter: Formal enough to create legal pressure, but professional enough not to permanently destroy the relationship
3. Payment plan negotiation: Often the best outcome, borrower agrees to structured repayment
4. Small claims or civil filing: If demand fails, I prepare the pro se filing package or represent you directly
5. Tax documentation: If the debt is truly uncollectible, I document the collection effort for an IRC §166 bad debt deduction (see Tax Write-Off tab)

If the borrower truly cannot or will not pay, the promissory note may qualify for a bad debt deduction under Internal Revenue Code §166. This is where demand letters become tax documentation, and it's a strategy I coordinate with my clients' CPAs regularly.

The IRS specifically looks for evidence of collection efforts. My demand letter packages for tax documentation purposes include:

• Formal demand letter with certified mail receipt: Proves you attempted collection on a specific date
• Follow-up demand (if no response): Shows persistence and escalation
• Final notice with litigation threat: Demonstrates you exhausted reasonable collection options
• Debtor's financial assessment: Documentation of insolvency or inability to pay
• Collection effort timeline: Chronological summary for CPA to attach to tax return

I work directly with your CPA or tax preparer to ensure the documentation meets IRS requirements:

1. Intake: Determine debt structure, promissory note, oral agreement, or equity investment
2. Document Collection: Gather the note, communications, payment records, and borrower financial info
3. Demand Letter Series: Send 2-3 demands to establish a clear collection effort record
4. Worthlessness Assessment: Document why further collection is futile
5. CPA Package: Deliver a complete IRC §166 documentation package to your tax preparer including:
   • Description of the debt (amount, date, terms)
   • Debtor identification and relationship
   • Chronological collection effort summary
   • Evidence of worthlessness
   • Classification recommendation (business vs. nonbusiness)
6. Tax Year Timing: Coordinate with CPA on which tax year to claim the deduction

Sergei Tokmakov, Esq.

California Bar #279869 · Collections & Commercial Litigation

I handle promissory note collection from first demand through judgment enforcement. My practice focuses on the cases that fall between "too small for a big firm" and "too complex for small claims", typically $10,000 to $250,000 in dispute.

Book a call to discuss your promissory note collection matter.