A promissory note in Delaware is enforceable when it meets the requirements of Article 3 of the state’s Uniform Commercial Code: an unconditional written promise to pay a fixed sum of money, signed by the borrower, payable on demand or at a definite time, and payable to order or to bearer. Delaware promissory note requirements also include an interest rate within the state’s legal cap, unless the loan qualifies for a key exception that removes the cap entirely. Get the drafting right and the note holds up on summary judgment; get it wrong and you may be left suing on an ordinary contract with weaker remedies and a shorter clock.
What Makes a Promissory Note Valid in Delaware
Under Delaware’s UCC, a note qualifies as a negotiable instrument when it contains an unconditional promise to pay a fixed amount of money, is payable on demand or at a definite future time, and is payable “to order” or “to bearer.”1Justia. Delaware Code Title 6 3-104 – Negotiable Instrument The borrower must sign it, and the note cannot require the paying party to do anything beyond paying money, aside from narrow exceptions like maintaining collateral or agreeing to a particular dispute forum.
Beyond the statutory minimum, a well-drafted note identifies the parties by name, states the principal amount, specifies an interest rate, and sets a maturity date. Optional provisions worth including: late fees, an acceleration clause that lets the lender call the full balance after a missed payment, and a governing-law provision. None of these are required for enforceability, but notes that lack them generate expensive disputes later.
One detail trips people up. A note that includes a conspicuous statement saying it is “not negotiable” falls outside Article 3 entirely, even if it otherwise meets every requirement.1Justia. Delaware Code Title 6 3-104 – Negotiable Instrument That doesn’t make the note worthless, but it strips away the streamlined enforcement and holder-in-due-course protections Article 3 provides. If you want those protections, leave that language out.
Interest Rate Limits and the $100,000 Exception
Delaware caps interest at 5% above the Federal Reserve discount rate (including any surcharge). That same rate is the default when a note is silent on interest.2Justia. Delaware Code Title 6 2301 – Legal Rate; Loans Insured by Federal Housing Administration If the discount rate sits at 4.5%, the legal rate is 9.5%.
Here is the exception most lenders miss: for loans exceeding $100,000 where repayment is not secured by a mortgage on the borrower’s primary residence, there is no interest rate cap at all.2Justia. Delaware Code Title 6 2301 – Legal Rate; Loans Insured by Federal Housing Administration A business borrowing $150,000 secured by equipment can agree to any rate the parties negotiate.
Post-judgment interest follows a separate rule. Once a court enters judgment on the note, the judgment accrues interest at the lesser of 5% over the discount rate or the original contract rate.2Justia. Delaware Code Title 6 2301 – Legal Rate; Loans Insured by Federal Housing Administration A high contract rate on a qualifying large loan won’t automatically survive into the judgment phase.
Secured and Unsecured Notes
Delaware recognizes several note structures, and the choice shapes both risk and recovery.
- Secured notes. The borrower pledges collateral — real property, equipment, inventory, or other assets. On default the lender can seize and sell it.
- Unsecured notes. No collateral. The lender’s only recourse is a lawsuit for the balance. Common between family, friends, and in deals where the borrower’s credit alone justifies the risk.
- Installment notes. Scheduled periodic payments instead of a lump sum. Can be secured or unsecured. Standard for real estate, auto, and much business financing.
- Demand notes. The lender can call the full balance at any time, with no fixed maturity. Maximum flexibility for the lender, maximum exposure for the borrower.
Perfecting a Security Interest in Personal Property
When personal property secures the note, filing a UCC-1 financing statement with the Delaware Division of Corporations is how the lender establishes priority over other creditors.3Delaware Division of Corporations. UCC Forms Delaware uses the national standard UCC form and accepts online filing. Without the filing, the security interest still exists between lender and borrower, but it loses priority to any creditor who did file. That oversight comes up more often than it should in commercial lending disputes.
Real estate is handled differently. The debt sits in the promissory note, and a separate mortgage document recorded with the county recorder of deeds creates the lien. Default leads to Delaware’s judicial foreclosure process rather than UCC remedies.
How Long You Have to Sue
Online sources often repeat a three-year limitation period for Delaware promissory notes. For negotiable instruments under Article 3, that’s wrong. The statute of limitations for a note payable at a definite time is six years after the due date. If the lender accelerates the balance, the six-year clock runs from the accelerated due date.4Justia. Delaware Code Title 6 3-118 – Statute of Limitations
Demand notes work differently. If a demand is made, the lender has six years from the demand to sue. If no demand is ever made, the note becomes unenforceable once ten years pass without any payment of principal or interest.4Justia. Delaware Code Title 6 3-118 – Statute of Limitations
The three-year period belongs to general contract actions under separate Delaware law — the kind that covers a casual written IOU that doesn’t qualify as a negotiable instrument. So drafting matters: a document that meets Article 3’s requirements gets six years, while a document that doesn’t may get three.
One further wrinkle. Delaware preserves the common law rule for instruments under seal, which historically carried a 20-year limitation period. If your note bears a seal, the six-year UCC period may not apply.4Justia. Delaware Code Title 6 3-118 – Statute of Limitations
What Happens When the Borrower Defaults
When payments stop, the lender’s options turn on what the note says. An acceleration clause lets the lender declare the full remaining balance due immediately. Without one, the lender can only sue for each missed payment as it comes due, which is slow and expensive. If the note includes late fees, those apply by their terms, though Delaware courts can scrutinize fees that function as penalties rather than reasonable estimates of the lender’s actual costs from late payment.
To recover the balance, the lender files suit and seeks a money judgment. Straightforward note cases often resolve on summary judgment without trial. Once a judgment enters, the collection toolkit opens up.
Garnishment and Other Post-Judgment Tools
Wage garnishment is the most common post-judgment remedy. Federal law caps ordinary garnishment at the lesser of 25% of disposable earnings or the amount by which weekly disposable earnings exceed $217.50 (30 times the federal minimum wage of $7.25). Delaware follows those federal limits. Disposable earnings means what’s left after mandatory deductions like income taxes and Social Security.
Beyond garnishment, a judgment creditor can pursue bank levies, liens on real property, and in some cases seizure of non-exempt personal property. Delaware also prohibits employers from firing an employee solely because of a garnishment summons.
Defenses a Borrower Can Raise
A borrower sued on a note has real options, though the burden of proof rests with the borrower.
Fraud, Duress, and Incapacity
If the borrower signed because of fraud so fundamental that they didn’t understand the nature of the document, the note can be voided. The same goes for duress (signing under threat or coercion) and lack of legal capacity (a minor, or someone adjudged incompetent). These “real defenses” work even against a holder in due course who bought the note later without notice of the problem.5Justia. Delaware Code Title 6 3-305 – Defenses and Claims in Recoupment Forgery of the borrower’s signature and discharge in bankruptcy also survive against any holder.
Unconscionability
Delaware courts can refuse to enforce a note whose terms are so one-sided that no reasonable person would agree to them under normal circumstances. The analysis looks at both process (unequal bargaining power, deception, lack of meaningful choice) and substance (terms unreasonably favorable to one party). Extreme interest rates on smaller loans, hidden compounding, and penalty structures grossly disproportionate to the lender’s risk are the usual targets.
Accord and Satisfaction
If a disputed debt exists and the borrower sends a check conspicuously marked as “payment in full” for a lesser amount, cashing it can discharge the entire debt. Under Delaware law, the claim is discharged when the borrower proves the payment was tendered in good faith as full satisfaction, the amount was genuinely disputed, and the instrument or an accompanying letter conspicuously stated it was offered as full settlement.6Justia. Delaware Code Title 6 3-311 – Accord and Satisfaction by Use of Instrument Organizational lenders can protect themselves by designating a specific office for disputed-debt communications and routing checks there.
Usury
A borrower charged more than the legal rate has remedies. If the note hasn’t been fully paid, the borrower can deduct the excess interest from the outstanding balance. If the borrower already paid the full amount including the illegal interest, they can sue to recover triple the excess interest collected or $500, whichever is greater, but only if the suit is filed within one year of the overpayment.7Justia. Delaware Code Title 6 2304 – Usury Defined; Borrowers Rights and Remedies Where Interest Exceeds the Lawful Rate Miss that one-year window and the treble-damages remedy is gone. The underlying debt stays valid; Delaware does not void the entire note for usury. The borrower simply isn’t required to pay the excess.
Tax and Federal Disclosure Issues
Private notes between individuals or between a business owner and the company carry federal consequences that often go unnoticed until the IRS writes.
If you lend at a rate below the IRS’s Applicable Federal Rate (AFR), the IRS treats the gap as if you had charged the AFR and made a separate gift of the forgone interest. The lender owes income tax on interest never actually received, and the borrower is treated as having received a gift.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates The AFR changes monthly and varies by loan term; the IRS publishes short-, mid-, and long-term rates each month.9Internal Revenue Service. Applicable Federal Rates
Two exceptions soften this. For gift loans directly between individuals totaling $10,000 or less, the imputed interest rules don’t apply at all, unless the borrower used the money to buy income-producing assets. For gift loans between individuals totaling $100,000 or less, the imputed interest for income tax purposes is capped at the borrower’s actual net investment income for the year.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates Zero net investment income means zero imputed interest. Above $100,000, the full AFR applies.
A lender who receives $10 or more in interest in a year must report it on Form 1099-INT, which applies to private loans, not just banks. Forgiving a loan balance can also trigger tax consequences — debt cancellation is generally income to the borrower, and a lender who forgives more than $19,000 to any one person in a year may need to account for the gift tax annual exclusion.10Internal Revenue Service. Frequently Asked Questions on Gift Taxes
The Truth in Lending Act and Regulation Z require disclosures when a creditor extends consumer credit. For 2026, Regulation Z applies to consumer credit transactions of $73,400 or less, with loans secured by real property and private education loans covered regardless of amount.11Federal Reserve Board. Agencies Announce Dollar Thresholds for Applicability of Truth in Lending and Consumer Leasing Rules for Consumer Credit and Lease Transactions These rules target creditors who regularly extend credit, not someone making a one-time loan to a relative. Business-purpose loans fall outside TILA entirely. When Regulation Z does apply, the lender must provide written disclosures of the APR, finance charge, total payments, and payment schedule before closing.