Business Articles - Legal and Insurance

Getting work is one thing, getting paid is another. Here's some advice about what to do if a client won't, or can't, pay.

You completed your latest project on time, sent an invoice to your demanding client, and are eagerly awaiting payment . . . and waiting . . . and waiting . . . and waiting. Does this scenario sound all too familiar?

The sad fact is that even the most seasoned independent contractors (ICs) often have difficulty getting paid. Some clients feel free to pay late; others never pay at all.

Businesses usually pay their employees like clockwork. They know that if they don't, the employees can complain to their state labor department, which can impose fines and otherwise make life miserable for the business. However, this is not the case when you're self-employed. There is no government agency that will help you get your money. It's entirely up to you to take whatever steps are appropriate and necessary to get your clients to pay up.

What's worse, many clients are aware of these hard facts of life and will purposely pay you late or not at all because they know many self-employed people simply don't have the will or know-how to collect what they're owed. You don't have to accept this type of unethical behavior. There are many legal methods available to get deadbeat clients to pay.

How to Demand Payment
Your first step in collecting an unpaid bill should be to send a statement or a collection letter requesting payment of the invoice. (Quicken Legal Business Pro provides 30-day, 60-day, and 90-day collection letters for this purpose.) Some firms routinely wait 60 or 90 days to pay bills because of cash flow problems of their own. If your clients follow this practice, sending a routine collection letter might prompt them to put the check in the mail.

Get Personal
If letters don't work, it's time to get personal. It's a lot harder to withhold payment from someone you know than from a stranger. For this reason, you shouldn't rely solely on successive collection letters. Instead, telephone the client. If you're dealing with a large company, you may have to first contact someone in the accounts payable or purchasing department. But if they don't prove helpful, don't hesitate to call higher-ups, including the president of the company.

Explain that cash flow is important to your business and that you can't afford to carry this unpaid receivable any longer. If phone calls don't work, make an appointment to personally visit whoever is in charge of paying you.

Be Persistent
When it comes to collecting debts, the squeaky wheel usually gets paid first. A client who is struggling financially and has only enough money to pay one creditor will likely pay the one who has made the most fuss. However, don't lose your temper, make threats, or otherwise harass the client. This kind of behavior can get you into legal trouble.

If letters, phone calls, and personal meetings don't get you what you're owed, you have a few options.

Formal Methods of Getting Money from Your Client
If you know the client has the money to pay you, or you think that he or she will have the money some time in the future, don't give up. There are a number of legal means available to collect debts.

Sue the Client in Small Claims Court
If the debt is not too large, the first option you should consider is suing the client in small claims court. All states have courts called small claims courts that are set up to resolve disputes involving relatively modest amounts of money. The limit is normally between $2,000 and $7,500, depending on your state. (To find out what your state limit for small claims court is, see How Much Can I Sue for in Small Claims Court?) If you're owed more than the limit, you can still sue in small claims court and waive (that is, give up your right to collect) the amount that exceeds the limit.

Small claims court is particularly well suited to collecting small debts because it's inexpensive and fairly quick. In fact, debt collection cases are by far the most common type of cases heard in small claims court. And you don't need a lawyer to bring your case. Indeed, a few states -- including California, New York, and Michigan -- don't allow anyone to be represented by a lawyer in small claims court.

If you file a suit in small claims court and your client doesn't show up when he or she is supposed to, you'll win by default. A substantial percentage of clients don't contest claims for unpaid fees in court because they know that they owe the money and can't win.

For more information on suing in small claims court, see Taking a Business Customer to Small Claims Court.

Sue the Client in Superior Court
If the client owes you substantially more than the small claims court limit for your state, you may wish to sue in a formal state trial court, usually called the municipal court or superior court. Debt collection cases are usually very simple, so you can often handle them yourself or hire a lawyer for the limited purpose of giving you advice on legal points or helping with strategy. In truth, few collection cases ever go to trial. Usually, the defendant either agrees to settle before trial or fails to show up in court (which gives you a default judgment for the amount owed).

Take the Client to Arbitration
Before you sue the client in court, be sure to look at your client agreement to see whether it contains an arbitration clause. This provision -- usually entitled "arbitration" -- requires you to submit any disputes with the client to arbitration, rather than going to court.

If your contract has such a clause, you'll be barred from suing the client in small claims court or any other court. This is not necessarily a bad thing. Arbitration is similar to small claims court in that it's intended to be speedy, inexpensive, and informal. The main difference is that an arbitrator, not a judge, rules on the case. An arbitrator's judgment can be entered with a court and enforced just like a regular court judgment.

When to Give Up
If the client has gone out of business or vanished from the face of the earth, or you know that he or she will likely never be able to pay you anything (either now or in the future), your best option may be to write off the debt. As the old sayings go, you can't get blood out of a turnip -- and you shouldn't throw good money after bad.

Unfortunately, if your business provides only services, you can't tax a tax write-off for the bad debt. The rationale behind this rule is that it would be too easy for independent contractors to inflate bills and claim large deductions for bad debts that were never really incurred. (If any part of the bad debt is for goods however, you can deduct the cost of goods that the client received but never paid for.

By Attorney Stephen Fishman