A Delaware promissory note is a written promise to pay a fixed sum of money, and if it’s drafted to meet the requirements of Article 3 of Delaware’s Uniform Commercial Code, it qualifies as a negotiable instrument that carries streamlined enforcement rights. Whether you’re drafting one, buying one, or trying to collect on one, the details that matter most are the note’s language, the interest rate, how any collateral is perfected, and how long you have to sue after a default.
What Makes the Note Valid
Under Delaware’s UCC, a promissory note becomes a negotiable instrument only 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 maker must sign it, and the note cannot require the paying party to do anything beyond paying money, with narrow exceptions like maintaining collateral or agreeing to a particular dispute forum.
Beyond those minimums, a well-drafted note identifies the parties by name, states the principal, specifies an interest rate, and sets a maturity date. Late fees, acceleration clauses, and a governing-law provision aren’t required for enforceability, but leaving them out tends to produce expensive disputes later.
Watch one drafting trap. A note that includes a conspicuous statement declaring itself “not negotiable” falls outside Article 3 entirely, even if it otherwise meets every requirement.1Justia. Delaware Code Title 6 3-104 – Negotiable Instrument The document remains enforceable as a contract, but it loses the streamlined enforcement rules and the holder-in-due-course protections Article 3 provides. If you want those protections, leave that language out.
Interest Rate Limits
Delaware caps interest at 5% above the Federal Reserve discount rate (including any surcharge). That same rate serves as the default when a note doesn’t specify one at all.2Justia. Delaware Code Title 6 2301 – Legal Rate; Loans Insured by Federal Housing Administration So the ceiling and the fallback are the same number. If the discount rate sits at 4.5%, Delaware’s legal rate is 9.5%.
The exception is the one most parties miss. For loans exceeding $100,000 that are not secured by a mortgage on the borrower’s primary residence, there is no interest rate cap.2Justia. Delaware Code Title 6 2301 – Legal Rate; Loans Insured by Federal Housing Administration This carve-out is a major reason Delaware is popular for commercial lending. A business borrowing $150,000 secured by equipment can agree to whatever rate the parties negotiate.
Post-judgment interest works differently. Once a court enters judgment on a note, the judgment accrues interest at the lesser of 5% over the Federal Reserve 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 doesn’t necessarily carry forward through the judgment phase.
Secured and Unsecured Structures
Delaware recognizes several common note structures, and the choice shapes both the lender’s risk and the remedies available on default.
- Secured notes. The borrower pledges collateral such as real property, equipment, or inventory. If the borrower defaults, the lender can seize and sell the collateral.
- Unsecured notes. No collateral. The lender’s only recourse on default is to sue for the balance. Common between family, friends, or where creditworthiness alone justifies the risk.
- Installment notes. Repayment happens through scheduled periodic payments rather than a lump sum. They can be secured or unsecured and are standard for real estate, auto, and business financing.
- Demand notes. The lender can call for full repayment at any time, with no fixed maturity. Maximum flexibility for the lender, maximum exposure for the borrower.
Perfecting a Security Interest
For personal property collateral, filing a UCC-1 financing statement is how a lender establishes priority. Delaware uses the national standard UCC form, which can be filed online through the Delaware Division of Corporations.3Delaware Division of Corporations. UCC Forms Without the filing, the security interest still exists between the parties, but it loses priority to other creditors who did file.
Real Property as Collateral
When real estate secures the note, the arrangement typically involves a separate mortgage document recorded with the county recorder of deeds. The note establishes the debt; the mortgage creates the lien. On default, the lender pursues Delaware’s judicial foreclosure process rather than UCC remedies.
When the Note Changes Hands
A negotiable note can be sold or assigned, and the new holder steps into the original lender’s shoes. In some cases the new holder actually gets stronger rights than the original lender had.
A “holder in due course” is someone who took the note for value, in good faith, without knowledge that it was overdue or dishonored, and without notice of any defenses or competing claims.4Justia. Delaware Code Title 6 3-302 – Holder in Due Course That status matters because a holder in due course can enforce the note free of most defenses the borrower could raise against the original lender. A complaint about the underlying business deal might block the original lender from collecting, but not a holder in due course who bought the note without notice of the dispute.
Some defenses survive even against a holder in due course: the borrower was a minor, the transaction was illegal, the borrower signed under duress or lacked legal capacity, the signature was forged, or the borrower has been discharged in bankruptcy.5Justia. Delaware Code Title 6 3-305 – Defenses and Claims in Recoupment These “real defenses” go to the fundamental validity of the obligation.
Default and Collection
When a borrower misses payments or otherwise breaches the note, the lender’s options depend on what the note says and whether it’s secured. Most commercial notes include an acceleration clause, letting the lender declare the entire remaining balance due immediately after a default. Without acceleration, the lender can only sue for each missed payment as it comes due. Late fees kick in according to the note’s terms, though Delaware courts can scrutinize fees that function as penalties rather than reasonable estimates of the lender’s actual costs.
To recover the unpaid balance, the lender files suit and seeks a money judgment. For straightforward cases where the borrower has no viable defense, courts often resolve the matter on summary judgment.
Post-Judgment Collection
A judgment unlocks enforcement tools that weren’t available before. Wage garnishment is the most common. Federal law caps ordinary garnishment at the lesser of 25% of disposable earnings or the amount by which weekly disposable earnings exceed $217.50, and Delaware follows those federal limits. 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 the employer received a garnishment summons for that employee’s wages.
How Long You Have to Sue
For a Delaware promissory note payable at a definite time, the statute of limitations is six years from the due date. If the lender accelerates the balance, the six-year clock starts from the accelerated due date.6Justia. Delaware Code Title 6 3-118 – Statute of Limitations
Demand notes work differently. If a demand is made, the lender has six years from that demand to sue. If no demand is ever made, the note becomes unenforceable once ten years pass without any payment of principal or interest.6Justia. Delaware Code Title 6 3-118 – Statute of Limitations
A shorter three-year period applies to general contract actions under separate Delaware law, covering debts not evidenced by a formal instrument. A casual written IOU that doesn’t qualify as a negotiable instrument under Article 3 might fall under that shorter window, so the distinction between a negotiable note and a simple contract promise carries real weight. Delaware also 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.6Justia. Delaware Code Title 6 3-118 – Statute of Limitations
Defenses a Borrower Can Raise
A borrower sued on a Delaware promissory note has real options, though the burden of proof falls on 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 entirely. The same applies to duress and lack of legal capacity, such as a minor or someone adjudged incompetent. These defenses work even against a holder in due course.5Justia. Delaware Code Title 6 3-305 – Defenses and Claims in Recoupment
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. Courts examine both the process (unequal bargaining power, deception, lack of meaningful choice) and the substance (terms unreasonably favorable to one party). Extreme interest rates on smaller loans, hidden compounding, and grossly disproportionate penalty structures are common flashpoints.
Accord and Satisfaction
If a disputed debt exists and the borrower sends a check clearly marked as “payment in full” for a lesser amount, cashing that check can discharge the entire debt. 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.7Justia. Delaware Code Title 6 3-311 – Accord and Satisfaction by Use of Instrument An organizational lender can protect itself by designating a specific person or office for disputed-debt communications and routing such checks there.
Usury
A borrower charged more than the legal rate can push back. If the note hasn’t been fully paid, the borrower deducts the excess interest from the outstanding balance. If the borrower already paid in full including the illegal interest, they can sue to recover triple the excess interest or $500, whichever is greater, but only if the lawsuit is filed within one year of the overpayment.8Justia. Delaware Code Title 6 2304 – Usury Defined; Borrowers Rights and Remedies Where Interest Exceeds the Lawful Rate The one-year window is short. The underlying debt remains valid; Delaware does not void the entire note for usury. The borrower simply isn’t required to pay the excess.
Tax and Federal Disclosure Boundaries
Two federal layers sit on top of Delaware law and catch private lenders off guard.
If you lend at a rate below the IRS’s Applicable Federal Rate, the IRS treats the difference as interest you charged and then gifted back to the borrower. You owe income tax on interest you never received, and the borrower is treated as receiving a gift.9Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans with Below-Market Interest Rates For gift loans 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 totaling $100,000 or less, the imputed interest for income tax is limited to the borrower’s actual net investment income for the year. Above $100,000, the full AFR applies. The AFR itself is published monthly by the IRS and varies by loan term.10Internal Revenue Service. Applicable Federal Rates
Interest received is reportable. A lender who collects $10 or more in interest during the year files Form 1099-INT, and this applies to private loans between individuals, not just banks. Forgiving a loan balance is generally treated as income to the borrower, and forgiveness above $19,000 to one person in a year implicates the annual gift tax exclusion.11Internal Revenue Service. Frequently Asked Questions on Gift Taxes
Truth in Lending Act disclosures generally target creditors who regularly extend consumer credit, not someone making a one-time personal loan. For 2026, Regulation Z applies to consumer credit transactions of $73,400 or less, though loans secured by real property and private education loans are covered regardless of amount.12Federal Reserve Board. Agencies Announce Dollar Thresholds for Applicability of Truth in Lending and Consumer Leasing Rules for Consumer Credit and Lease Transactions Business-purpose loans fall outside TILA entirely. Someone who makes multiple loans, advertises lending services, or charges interest on consumer-purpose loans can cross into creditor territory and trigger disclosure obligations before the loan closes.