You’ve done the work. Now it’s time to get paid.
But what do you do about a client who refuses to pay you? What are your options for legal recourse, if any? And how can you reduce your delinquent payments in the future while maintaining good relationships with your clients?
Here’s how to collect on your debts, reduce the number of accounts receivable problems you experience moving forward, and keep your business going.
Talk to the client
Communication is key. If your client isn’t paying you and you’re unsure why, the first step is to consult them in a non-confrontational manner. It’s important to reach the homeowner in this early stage because as time goes on, it gets increasingly difficult to collect on your debt.
- Sometimes nonpayment is a result of a misunderstanding. Try to find out why the client is withholding money. Have they not realized that you haven’t been paid in full? Or are they alleging that there’s something wrong with your work?
- If the client simply can’t afford the price tag — and you’re only finding this out when it’s time for them to pay — you might want to negotiate on a payment plan. Allowing them to make payments on the lump sum until the balance is paid off may be inconvenient for you, but it’s better than not getting paid at all. Depending on your original contract with the client, you may be able to charge interest on their payments.
Taking legal action
If the client is avoiding you or refusing to pay because of illegitimate reasons, you can take legal action against them. It’s unfortunate because this damages your business relationship, but this might be the only way to recover your money.
- First, have your attorney send a certified demand letter to the client. A demand letter threatens legal action against the client if they do not pay their debt by a certain date. Depending on your jurisdiction, you may be required to serve the client with a demand letter before filing a lawsuit.
- If the demand letter doesn’t give you results, you can proceed to the courts. To get started with a small claims suit, you’ll often have to file a civil complaint with the local magistrate. Depending on your locale, the client is given a certain number of days — usually 30 — to pay the debt. If they don’t pay, a court date is set, and you proceed to small claims court.
- After you’ve been awarded the judgment in a small claims court, the client is usually given 30 days to pay the debt and thus make good on the judgment. If their time runs out and they still haven’t paid, you can take the following actions to fulfill your debt:
- File an execution with the district court. After you file, the court will send a constable to levy the client’s belongings (this is known as an attachment lien). Wage garnishment is another option that might be ordered by the court. The client has a right to object to any of these actions; if they do, a court hearing will be set and the judge will decide how to proceed. Note that depending on your location, filing an execution at a district court can cost you several hundred dollars.
- Record a certified copy of the judgment at the county records office. This converts the judgment into what’s known as a lien on real property. The lien is attached to the title of the property where the work took place. It prevents the homeowner from selling or refinancing the property until they pay off the debt. A lien on real property can be used in conjunction with garnishments and/or an attachment lien in order to recover your money.
- Turn the debt over to collections. If the debt is too insignificant to warrant time in court and the fees that go along with it, you might want to consult a collections agency. In exchange for taking on the debt themselves, the agency will often take a portion of the money that’s recovered or only pay you a percentage of the total amount you’re owed. Although this is a disadvantage to you because you’re not recovering the full debt, the collections agency is essentially taking the burden off your hands — they do all the “dirty work” of hounding the client. If you pass on the debt to a collections agency, you must notify the courts that your debt has been settled.
Avoiding delinquent invoices in the future
It’s your right to collect money for the work you’ve done. Going forward, make sure to limit the amount of leeway your clients have to dispute or avoid payment.
- Secure a deposit before you begin work to prevent clients from disappearing once the project is done. You can also consider asking for your payment in installments. Set clear dates or project goals at which you will be paid each installment, and lay out this payment timeline — including the deposit — in your contract with each client.
- Review your invoicing system and contracts to make sure your terms — especially the language regarding payment — is clear. If your contract doesn’t include a clause about charging interest on long-term lump sum payments, consider consulting your attorney to add one.
- Send a polite reminder in the form of a written letter a few days before each installment is due. This helps to keep your clients updated and can greatly reduce the number of delinquent invoices you have to deal with.
- Make sure that your clients sign off on any changes that increase the scope and price of the project. This will make it harder for them to dispute the final cost of the project when it’s time for them to pay.
Delinquent clients are a contractor’s worst nightmare. They threaten the viability and integrity of your business. But if you keep these tips in mind and you’re aware of your rights as a business owner, you’ll be well on your way to reducing the amount of problems you experience moving forward.
Please note: The information in this blog post is intended for educational purposes only and not for the purpose of providing legal advice. Please consult with your attorney(s) regarding your specific situation.