Your Note Is in Default in Texas — Here Are Your Options

When a borrower stops making payments on your promissory note, it feels personal. You extended credit in good faith, the borrower promised to pay, and now that promise has been broken. Beyond the emotional frustration, a defaulted note creates real financial and legal questions that demand clear-headed answers. What do you do? Do you wait and hope the borrower catches up? Do you start foreclosure? Can you even sell a note when the borrower is not paying?

The reality is that defaults happen in the Texas note market with more regularity than most people realize. Economic downturns, job losses, health crises, divorces, and simple financial mismanagement all contribute to borrowers falling behind or stopping payments entirely. As a note holder, you are not powerless in this situation — you have multiple options, each with its own trade-offs in terms of cost, time, risk, and financial outcome.

This guide walks through every option available to you when your Texas promissory note goes into default. Whether the borrower missed last month's payment or has not paid in a year, you will find practical guidance on how to evaluate your situation and choose the path that makes the most sense for your specific circumstances.

Understanding Default: What It Means and When It Occurs

Default occurs when the borrower fails to meet their obligations under the promissory note. While most people think of default as simply missing payments, the definition is typically broader than that.

Types of Default

Payment default is the most obvious — the borrower fails to make the required monthly payment by the due date plus any grace period specified in the note. But notes can also go into default for other reasons. The borrower might fail to maintain hazard insurance on the property, fail to pay property taxes, violate a due-on-sale clause by transferring the property without authorization, allow the property to deteriorate significantly, or breach any other covenant in the note or deed of trust.

Each type of default triggers different rights and remedies for the note holder. Payment defaults are the most common and the focus of this guide, but if your borrower has violated a non-payment covenant, the same general options apply.

Grace Periods and Notice Requirements

Before you can take action on a default, you need to comply with any notice requirements in the note and deed of trust, as well as any requirements under Texas law. Most notes include a grace period — commonly 10 to 15 days — during which a late payment is not considered a default. After the grace period expires, the note is technically in default, but Texas law and most deed of trust forms require you to send the borrower a written notice of default and an opportunity to cure before you can initiate foreclosure.

The standard notice under a Texas deed of trust gives the borrower at least 20 days to cure the default after receiving written notice. Only after the cure period expires without the borrower bringing the note current can you proceed with foreclosure. It is important to follow these procedures precisely — failure to provide proper notice can delay or invalidate a foreclosure.

Option 1: Work It Out With the Borrower

Before pursuing any formal action, consider whether a direct conversation with the borrower can resolve the situation. Many defaults are caused by temporary circumstances — a job loss, a medical event, a family crisis — and borrowers who want to keep the property are often willing to work out an arrangement to get back on track.

Forbearance Agreement

A forbearance agreement is a temporary modification where you agree to accept reduced payments, deferred payments, or a pause in payments for a defined period while the borrower addresses their financial difficulty. At the end of the forbearance period, the borrower resumes regular payments and makes up the missed amounts according to an agreed schedule.

Forbearance makes sense when you believe the borrower's difficulty is genuinely temporary, the borrower is communicative and cooperative, the property is well-maintained and the taxes and insurance are current, and you are willing to accept a short-term disruption in exchange for the long-term continuation of the note.

Loan Modification

A loan modification permanently changes the terms of the note — reducing the interest rate, extending the term, reducing the payment amount, or even forgiving a portion of the principal. This is a more significant step than forbearance because it permanently alters the economics of the note.

Modification makes sense when the borrower's financial situation has permanently changed, the current payment is genuinely unaffordable, you prefer to keep the note performing at modified terms rather than foreclose, and the property is worth more than the note balance, giving you confidence in the collateral. Any modification should be documented in a written agreement signed by both parties and ideally reviewed by an attorney.

Deed in Lieu of Foreclosure

If the borrower cannot make the payments and does not want to go through foreclosure, they can voluntarily transfer the property to you through a deed in lieu of foreclosure. This gives you the property without the time and expense of the foreclosure process. In exchange, you release the borrower from the remaining obligation under the note.

A deed in lieu makes sense when the borrower is cooperative, the property is worth more than or close to the note balance, and you are willing to take ownership of the property. The main risk is that you become the property owner, which means you are responsible for taxes, insurance, maintenance, and eventual sale of the property.

Option 2: Sell the Note As-Is

One of the most overlooked options for holders of defaulted notes is selling the note to a professional buyer even though it is in default. Many note holders assume that a non-performing note is worthless. It is not. The property securing the note still has value, and experienced note buyers know how to evaluate and price that value.

Why Buyers Purchase Defaulted Notes

Professional note buyers and investors purchase defaulted notes because they have the expertise, resources, and legal infrastructure to resolve the default and extract value from the situation. They may work out the borrower to re-perform the note, foreclose and sell the property, or negotiate a deed in lieu and then sell or hold the property. The buyer is essentially purchasing the right to pursue these remedies, and they pay a price that allows them to profit after the cost of resolution.

What a Defaulted Note Is Worth

A defaulted note is worth less than a performing note — that much is obvious. The discount reflects the additional risk, the cost of resolution, and the time required to either re-perform the note or foreclose and sell the property. The key factors that determine a defaulted note's value include the current market value of the property, which is the most important factor since it determines the buyer's recovery in a foreclosure scenario. The note balance relative to property value also matters — a defaulted note with a 50 percent LTV is much more attractive than one at 90 percent LTV. The length and severity of the default, the likelihood that the borrower will cure or cooperate, and the condition of the property and the cost of any needed repairs all play roles in the buyer's valuation.

The Advantage of Selling a Defaulted Note

Selling a defaulted note has several advantages over pursuing foreclosure yourself. You get cash immediately instead of spending months in the foreclosure process. You avoid the legal costs of foreclosure, which can run $3,000 to $10,000 or more in Texas. You avoid the emotional stress of pursuing legal action against the borrower. You eliminate the risk of the property being damaged, vandalized, or neglected during the foreclosure process. And you avoid becoming a property owner with all the responsibilities that entails.

Even if the price you receive for a defaulted note is significantly less than what a performing note would bring, it may be the best financial outcome when you factor in the cost, time, and risk of the alternatives. For more perspective on selling versus foreclosing, see this comparison of selling your note vs. foreclosure in Texas.

Option 3: Foreclose on the Property

Foreclosure is the legal process by which you, as the note holder, take ownership of the property securing the note after the borrower has defaulted. In Texas, the most common form is non-judicial foreclosure, which is conducted through the trustee named in the deed of trust without the need for a lawsuit.

The Texas Non-Judicial Foreclosure Process

Texas non-judicial foreclosure follows a specific statutory process. You send the borrower a written notice of default and demand for cure, giving them at least 20 days to bring the note current. If the borrower does not cure, you file a notice of sale with the county clerk and notify the borrower at least 21 days before the sale date. The sale takes place on the first Tuesday of the month at the county courthouse, conducted by the trustee named in the deed of trust. The property is sold to the highest bidder, which may be you as the note holder bidding up to the amount you are owed.

The entire process from notice of default to foreclosure sale takes a minimum of approximately 41 days, but practically speaking, two to three months is more typical when you account for mailing times, procedural requirements, and scheduling.

Costs of Foreclosure

Foreclosure is not free. Attorney fees for managing the process typically run $2,500 to $5,000 for a straightforward non-judicial foreclosure. Trustee fees add another $500 to $1,000. Filing and mailing costs add a few hundred dollars. If the borrower contests the foreclosure or if complications arise, legal costs can escalate significantly. If the property is vacant or abandoned during the process, you may also incur costs for securing, maintaining, or cleaning up the property.

What Happens After Foreclosure

If you are the successful bidder at the foreclosure sale, you now own the property. This means you are responsible for property taxes, insurance, maintenance, and the eventual sale of the property. If the property is occupied, you may need to pursue eviction proceedings to remove the former borrower. You will also need to assess the property's condition and determine whether repairs are needed before it can be sold or rented.

If a third party outbids you at the foreclosure sale, the sale proceeds are applied first to your note balance and the costs of foreclosure. Any excess goes to the borrower. If the sale price is less than what you are owed, Texas allows you to pursue a deficiency judgment against the borrower for the difference, though collecting on deficiency judgments can be difficult.

When Foreclosure Makes Sense

Foreclosure is the right option when the property is worth significantly more than the note balance, giving you substantial equity to recover. It also makes sense when the borrower is uncooperative and unwilling to work out the situation, when you are willing to invest the time and money to pursue the legal process and manage the property afterward, and when you have the financial resources to cover the foreclosure costs upfront.

Option 4: Negotiate a Discounted Payoff

Sometimes a borrower who cannot make the regular monthly payments can come up with a lump sum to pay off the note at a discount. A discounted payoff — sometimes called a short payoff — is an agreement where you accept less than the full balance owed in exchange for the borrower paying the agreed amount and the note being satisfied.

When This Works

A discounted payoff makes sense when the borrower has access to a lump sum — perhaps from a family member, a loan, or the sale of another asset — but cannot maintain the monthly payments. The amount you accept should be compared to what you would receive from selling the note as-is or from foreclosing and selling the property, net of costs and time.

For example, if your note balance is $80,000, a buyer would pay $45,000 for the defaulted note, and foreclosure would net you approximately $55,000 after costs and a six-month timeline, a discounted payoff offer of $60,000 from the borrower would be the best outcome for you — more money, less hassle, and no foreclosure to manage.

Getting It Done Right

Any discounted payoff should be documented in a written agreement that specifies the exact amount to be paid, the deadline for payment, the release of the borrower from the remaining obligation, and the satisfaction and release of the deed of trust upon receipt of payment. Have the agreement reviewed by an attorney to ensure it is enforceable and that the release is properly drafted.

Making the Right Choice for Your Situation

Each of these options has its place, and the right choice depends on your specific circumstances. Here is a framework for thinking through the decision.

Consider Your Financial Position

Can you afford to wait months for the foreclosure process to play out? Can you cover the legal costs? Can you absorb the carrying costs of owning a property if you foreclose and take it back? If the answer to any of these questions is no, selling the note as-is may be the most practical option even though the price is lower than what you might get through other paths.

Consider Your Risk Tolerance

Foreclosure involves uncertainty — the property's condition, the borrower's response, potential legal challenges, and the eventual sale of the property. Selling the note transfers all of that uncertainty to the buyer. If you prefer certainty over maximum potential return, selling is the lower-risk path.

Consider Your Time and Energy

Foreclosure is a project. It requires attention, decision-making, and ongoing management for months. Selling the note is a transaction that is done in two to four weeks. If you have better uses for your time and energy, selling lets you move on quickly while still recovering meaningful value from the note.

Get a Professional Valuation

Before committing to any path, get a cash offer from a professional note buyer. This gives you a concrete number — what the market will pay for your note in its current condition. You can then compare that number to the estimated outcomes of other options and make an informed decision. Longhorn Note Buyers provides cash offers within 24 hours, even on defaulted notes, giving you the data you need to decide quickly. For a broader perspective on how note values are determined, see this guide on what determines note value in Texas.

Why Longhorn Note Buyers for Defaulted Notes

Longhorn Note Buyers has purchased defaulted notes across Texas for decades, with founder Nick McFadin's experience in the note business dating back to 1983. They understand that a defaulted note is not a lost cause — it is an asset with real value that requires specialized expertise to evaluate properly.

With over $47 million in notes purchased, an A+ BBB rating, and a 100 percent close rate on quoted deals, Longhorn can evaluate your defaulted note quickly and provide a fair, market-based offer. They have the experience to assess the situation accurately, the capital to close without delays, and the legal infrastructure to handle the resolution after purchase. When you sell a defaulted note to Longhorn, you walk away with cash and leave the complexity behind.

Ready to Explore Your Options?

If your Texas promissory note is in default and you want to know what it is worth on the open market, the answer is a phone call away. Contact Longhorn Note Buyers today at (210) 828-3573 or visit longhornnotebuyers.com to get your free, no-obligation cash offer within 24 hours. Whether you decide to sell, foreclose, or pursue another option, having a market valuation in hand gives you the information you need to make the best decision for your situation.

Frequently Asked Questions

Can I really sell a note when the borrower is not paying?

Yes. Professional note buyers regularly purchase non-performing notes. They buy them at a discount that reflects the cost and risk of resolving the default, but the property securing the note still has value, and that value supports a purchase price. The worse the default situation, the steeper the discount — but as long as the property has meaningful value, the note is sellable.

How much less will I get for a defaulted note compared to a performing one?

Defaulted notes typically sell at discounts of 40 to 65 percent from the remaining balance, compared to 10 to 30 percent for performing notes. The exact discount depends on the property value, the LTV ratio, the severity and duration of the default, the condition of the property, and the buyer's assessment of resolution costs. A defaulted note with a low LTV ratio and a valuable property will command a significantly better price than one with a high LTV and a deteriorating property.

How long should I wait before taking action on a default?

Do not wait long. The longer a default persists, the worse the situation typically gets. The borrower may stop maintaining the property. Property taxes may go unpaid, creating priority liens. Insurance may lapse, leaving the collateral unprotected. The borrower's financial situation may deteriorate further, making recovery less likely. Address the default within 30 to 60 days of the first missed payment, whether that means contacting the borrower, initiating foreclosure, or selling the note.

What if the borrower files for bankruptcy?

A bankruptcy filing triggers an automatic stay that prevents you from taking collection or foreclosure action without court permission. This significantly complicates and delays the resolution process. If the borrower files for bankruptcy, consult with an attorney immediately. Selling a note where the borrower is in bankruptcy is possible but requires a buyer with specific expertise in bankruptcy situations. The price will reflect the additional complexity and delay.

Can I pursue the borrower for the difference if the note sells for less than I am owed?

When you sell the note to a third party, you are selling your entire interest in the note — including any deficiency rights. The buyer may choose to pursue a deficiency claim against the borrower after foreclosure, but that is the buyer's decision, not yours. Once you sell the note, your relationship with the borrower and the note is completely severed. You receive the purchase price and move on.