There are few worse feelings in business than providing a client with the world-class service or product you’ve worked so hard to develop, only to end up chasing them around in circles trying to collect payment.
Delayed payments are one thing, as you can typically follow up enough and eventually get your payment. But at a certain point, you’re left wondering what rights you have under non-payment of invoice law.
Can you take them to court? Yes, in many cases, you can. The better question is - is it really worth pursuing legal action? Oftentimes you’ll spend more in legal proceedings than you’ll make up in collection.
Still, we’ll help you understand the pros and cons of going through with legal proceedings below and show you a few alternatives you can try first. Then, we’ll help you navigate the legal system as a creditor.
Our accounts receivable automation software is designed specifically for businesses that struggle with late or non-payment. It helps you get paid faster without you having to actually do anything, as it’s a completely hands-off solution. Learn how it can help you below!
This article is for informational purposes only and does not constitute legal advice. For specific legal concerns regarding non-payment of invoices, please consult with a qualified attorney.
First, what exactly is the non-payment of invoice law, if one exists? The legal landscape can be complex and confusing when it comes to non-payment.
There are several legal principles and regulations protecting you, each with its own steps for pursuing unpaid debts. These vary by jurisdiction but generally fall under contract law, which governs the agreements between businesses and their clients.
When doing business with someone you are the creditor - meaning they owe you money for goods or services rendered. With this comes specific legal rights in the event they fail to pay their debt, as this is known as a “breach of contract.”
The contract, whether written or verbal, sets the terms for payment and delivery of services or goods. If you do your part, but the client fails to meet these terms, you have the right to seek payment through a variety of legal means.
This includes sending demand for payment letters, learning how to send an invoice to collections, or in this case pursuing legal action.
It’s not just about recovering the initial debt you’re owed either. In some cases, you may be eligible to collect the maximum late fees by state on the invoice as well.
Some jurisdictions have statutory protections that automatically entitle you to compensation for late payments, even if this isn't explicitly mentioned in the contract. This is why, ultimately, your best bet is to work with a legal professional in your area as you navigate non-payment of invoice law.
Speaking of specific jurisdictions, yours may have statutory payment terms that define when an invoice is legally due and payable. These terms typically range from 30 to 60 days from the date of the invoice, unless otherwise agreed upon by both parties.
For example, the Late Payment Directive of the European Union mandates payments must be made within 30 days unless a different period is agreed upon. It goes on to stipulate that businesses can automatically charge interest on overdue payments after this period.
You need to understand these statutory deadlines in order to maintain a healthy cash flow. After all, slow or non-payment of invoices is one of the reasons cash flow problems usually start.
While you do have rights as a creditor, you need to weigh the pros against the cons when considering pursuing legal action. Sure, you want to collect the amount you're owed - but at what cost? Here’s what you need to know…
Only you can determine if the potential recuperation of money you’re owed is worth these drawbacks. There is no guarantee the court will side with you, even if you’re clearly in the right. Like we said, these legal battles can be very complex.
Even if you do win the case, it’s unlikely you’ll be paid in full right away. The court will work with the defendant to set up payment plans in some cases - but it’s better than nothing.
It’s clear that navigating non-payment of invoice law can be a stressful, costly, and time-consuming endeavor. That’s why we encourage you to explore alternative solutions before taking things to court. Here are three different things you can try.
We’re going to assume you’ve already done your due diligence in reaching out to the client through different means to get paid. If not, start there.
A simple payment reminder email might be all it takes to collect what you’re owed. You can try written letters as well as phone calls if an email doesn’t get the job done.
Make sure to reference the invoice number, the due date, and the outstanding amount in your communication. Remind the client of any late fees or interest that may accrue if the payment is not made by a certain date. We have a great resource on invoice late fee wording if necessary.
As frustrating as this situation may be, take any sort of emotion out of the conversation. Financial difficulties or dissatisfaction with the services provided could be reasons for non-payment, and being understanding of these can help you work with the client to find a solution that works for both parties.
If the client is facing financial difficulties but is eager to pay what they owe, offering a payment plan can be a practical solution that allows them to pay off the invoice in smaller, more manageable installments.
Make sure the payment plan is clearly documented, including the amounts, due dates, and any penalties for missed payments. We have a great guide on how to set up recurring payments if you need more guidance. This is something our billing automation system supports, too!
In some cases, negotiating a settlement may be the only way to recover at least a portion of the outstanding amount. This could involve offering a discount for immediate payment or agreeing to reduce the overall amount owed in exchange for prompt settlement.
While this means accepting less than the original invoice amount, it could be preferable to not receiving any payment at all. Remember, the goal is to avoid the costs of legal action - so even if you earn less in the end, you could save money in comparison to going to court.
Whether you opt for a payment plan or a negotiated settlement, formalize the agreement in writing. Clearly outline the terms of the agreement, including the payment schedule, any reductions in the amount owed, and the consequences of failing to meet the agreed-upon terms.
This way if you continue to run into issues getting your client to pay their debt, you have more ammunition should things progress to legal proceedings.
We mentioned earlier that sending an invoice to collections is an option as well, but we consider this to be a last resort just before pursuing more formal legal action.
Debt collectors specialize in recovering outstanding payments and often have the expertise to handle difficult cases that you may not have the time or resources to pursue. But like the legal process itself, these agencies can be expensive. They may not recover the full amount either.
Choosing the right debt collection agency is important. You want to work with one that’s reputable and compliant with relevant laws and regulations, such as the Fair Debt Collection Practices Act (FDCPA).
Just as with pursuing legal action, sending a client to collections will likely sever the relationship. Again, though - you’re past the point of trying to remain in good standing with a client that refuses to pay you. Don’t let this deter you from getting what you’re owed.
Now, if you end up determining that the only way to move forward is by exercising your rights under the non-payment of invoice law, we have your back. Here’s what you should expect along the way and how to set yourself up for a favorable outcome.
Start by gathering all relevant documentation, including copies of the original invoice, any contracts or agreements, email correspondence, and records of phone calls or meetings.
We’re going to assume you’ve already weighed the costs of legal action against the potential revolver of your debt - factor in not just the cost of a lawyer but also the time commitment associated with spending time in court.
This is also a good time to seek legal advice from an attorney who specializes in debt recovery. They can help you set your expectations and determine if it’s truly worth moving forward or not.
Small claims court is designed for resolving disputes involving relatively small amounts of money, which is where you’ll likely want to start this legal battle. It’s far more streamlined than other courts, so you can resolve the dispute faster.
The maximum amount you can claim varies by jurisdiction, so check your local regulations to determine if your case qualifies.
Then, initiate the case by filing a claim or complaint with the court clerk. This document will outline the details of your case, including the amount owed, the reason for the dispute, and any supporting evidence. You’ll likely need to pay a filing fee as well, which you may be able to recover as part of your damages if you win the case.
After filing your claim, you must serve the defendant (the client) with a copy of the claim and a summons to appear in court. You can serve the defendant by certified mail, a process server, or through the local sheriff's office. If you hire an attorney for this case, they may be able to serve the client themselves as well.
It’s common for both parties to represent themselves - without attorneys - in small claims court. You’ll present your case to the judge, including all relevant documentation and evidence, and a ruling will then be issued based on the merits of your case.
If you win, the court will order the defendant to pay the amount owed.
If your case is more complex or the amount owed exceeds the limit for small claims court, moving forward with a civil suit will be your best bet. This process is more formal and often requires the assistance of an attorney.
Your attorney will file a complaint outlining your claims and the relief you seek, such as the payment of the outstanding invoice. Both parties engage in a discovery process, where they exchange information and evidence relevant to the case.
This may include depositions, interrogatories, and requests for documents. Ideally, you’d be able to reach a settlement during discovery and avoid actually going to trial.
Otherwise, you’ll present your evidence and arguments before a judge or jury. The judge or jury will then determine the outcome of the case, including whether the defendant is liable for the amount owed.
Throughout the trial remember that you have the ability to settle the case outside of court at any time. This can involve an agreement where the client agrees to pay a portion of the debt or establishes a payment plan to satisfy the outstanding amount.
Reaching a settlement should be your goal, as it will save both parties time, money, and stress.
Hopefully, you’re able to win your case and start capturing the payment you’re owed, whether all at once or over the course of time through a payment plan.
One of the biggest misconceptions, though, is that once a court rules in your favor, the battle is over. That’s not necessarily the case. You need to be prepared to enforce the ruling.
One common method of enforcing a judgment is wage garnishment, where a portion of the debtor’s wages is automatically deducted and sent to you until the debt is paid in full. You’ll need to obtain a court order for garnishment, and there are limits on the amount that can be garnished based on the debtor’s income.
Another option is to place a lien on the debtor’s property, such as real estate or vehicles. This prevents the debtor from selling or refinancing the property until the debt is paid. If the debtor doesn’t voluntarily pay the debt, you may be able to force the sale of assets to satisfy the debt.
Or, you could levy the debtor's bank account in some cases. This allows you to withdraw funds directly from their account to satisfy the debt.
Throughout this process, you may need continued assistance from an attorney, as enforcement can be complex. Keep in mind that judgments are usually valid for a certain number of years and can often be renewed if the debt remains unpaid.
There you have it - how to pursue non-payment of invoice law. But remember, an ounce of prevention is worth a pound of cure. We highly recommend you learn how to get invoices paid faster so that you don’t have to deal with this issue going forward.
Sure, dealing with sketchy clients who refuse to pay their debts is simply a risk you take as a business owner. But there are quite a few things you can do to mitigate this concern:
Many of these strategies can be automated through the best AR automation software, InvoiceSherpa. Our accounts receivable automation solution costs a fraction of what you’d pay a full-time employee or even the cost of outsourcing to accounts receivable management services.
It saves you a ton of time and stress in managing your accounting process while helping you get paid faster. Clients are offered a variety of ways to pay and even get their own dedicated portal.
You can automate follow-ups for payment, and anytime a client pays, AR reconciliation happens automatically over in your accounting software. You can integrate with payment processors like Stripe or PayPal and accounting software like Quickbooks, Clio, or Xero.
It takes just a few minutes to learn how to automate accounts receivable with our system, and the accounts receivable automation use cases are seemingly endless. Don’t just take our word for it, though. Try it risk-free today!
Invoicing issues are one of the most common issues businesses face, which is why understanding non-payment of invoice law is so important. When you know your rights, you can then weigh the pros and cons of pursuing legal action and act accordingly.
Find more accounting tips in our blog, like accounts receivable forecasting, how to calculate accounts receivable, why cash is important to a business, accounts receivable automation best practices, accounts receivable challenges and how automation can help, unbilled receivables, and what is AR automation software.
Otherwise, get started reaping the benefits of AR automation today with the best automated invoice processing software - InvoiceSherpa. Streamline your billing, automate reminders, and reduce the risk of non-payment with our powerful system today.
Posted on September 3, 2024
