To collect a debt from a client who won’t pay, work through an escalating sequence: documented reminders, a written payment plan if the client will engage, a formal demand letter, a collection agency or debt collection attorney, and finally a lawsuit followed by post-judgment tools like wage garnishment or a bank levy. Every step depends on the paperwork you built at the start, and every state sets a deadline for filing suit, so speed matters as much as strategy.
Build the Paper Trail Before You Contact Anyone
Pull together every record that proves the debt exists and that you delivered what you promised: signed contracts, purchase orders, itemized invoices, proof of delivery or signed acknowledgments, and any time logs or project milestones from your project software. If the work happened in phases, match each phase to its invoice so there’s no ambiguity about what was delivered and when.
Organize the records by date. A clean timeline showing when the work was performed, when you invoiced, and when payment was due carries you through every later step, whether you’re writing a demand letter, briefing a collection agency, or presenting evidence to a judge. Gaps in documentation are where debtors argue about quality or scope.
Start With Reminders, Then Try a Payment Plan
Send a polite, direct email referencing the specific invoice number, the amount due, and the original due date. Most accounting software can trigger these automatically. If the first email gets no reply, follow up by phone. You’re trying to learn whether the client forgot, is short on cash, or is avoiding you.
Log every call, email, and voicemail with the date, who you spoke with, and what was said. Those logs document your good-faith attempts to resolve things informally, and they become evidence if you end up in court.
When the client acknowledges the debt but can’t pay in full, a structured payment plan often recovers your money faster than litigation. Put the agreement in writing with the total owed, the number and size of installments, exact due dates, the accepted payment method, and a default clause. The default clause is the piece that gives you leverage: it should state that if the client falls behind by a set number of days, the entire remaining balance becomes due immediately. That acceleration provision lets you file suit for the whole amount instead of chasing individual missed payments. Both parties sign and date.
Send a Formal Demand Letter
When reminders and negotiation stall, a formal demand letter puts the client on written notice that you intend to pursue legal action. Include the client’s full legal name and address, the total amount owed with any late fees your contract authorizes, the specific invoices and dates of service, and a deadline for payment, typically 10 to 30 days from the date of the letter.
A letter on attorney letterhead often produces a faster response than one from your accounts receivable department, because it signals that litigation is a realistic next step. If you don’t have an attorney, a clear factual letter on your own letterhead still creates the paper trail you need before filing suit.
When Federal Collection Rules Apply
The Fair Debt Collection Practices Act does not cover business-to-business invoices. It defines “debt” as an obligation arising from a transaction for personal, family, or household purposes.1Federal Trade Commission. Fair Debt Collection Practices Act Even for consumer debts, the FDCPA applies to “debt collectors,” meaning third parties whose business involves collecting debts owed to someone else. If you collect your own invoices in your own name, you generally aren’t subject to it, because the statute excludes officers and employees of a creditor who collect for that creditor using the creditor’s own name.2Office of the Law Revision Counsel. 15 USC 1692a – Definitions Hire a collection agency or use a fictitious name that suggests a third party is collecting, and the FDCPA kicks in. The collector must then send the debtor a written validation notice within five days of first contact, informing them of their right to dispute the debt within 30 days and request verification.3Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts
Hire a Collection Agency or Debt Collection Attorney
When your own efforts stall, a professional collector or a debt collection attorney takes over. Most collection agencies work on contingency, taking a percentage of what they recover and charging nothing if they collect nothing. Commission rates generally fall between 25% and 50% of the recovered amount. Older, smaller debts cost more in commission than fresh, larger ones because they’re harder to collect. Some agencies charge flat fees for simpler accounts, but contingency is the industry standard.
Debt collection attorneys typically charge similar contingency rates or bill hourly if the matter heads to court. An attorney can send a demand letter on firm letterhead, negotiate with the debtor’s counsel, and file suit under one engagement. Ask upfront whether court costs and filing fees come out of your recovery or get billed separately.
Watch the Statute of Limitations
Every state sets a deadline for filing a debt collection lawsuit, and once it closes you lose the right to sue even on a legitimate debt. For written contracts, the deadline ranges from 3 years in the shortest states to 10 years in the longest. Oral agreements typically have shorter windows. The clock usually starts on the date of the last missed payment or the date the debt became due.
Two things can reset or extend the clock in many states. A partial payment from the debtor may restart the statute of limitations from the date of that payment.4Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old A written acknowledgment of the debt can have the same effect. Not all states treat partial payments as a reset, so check your state’s rule. The practical takeaway: don’t sit on unpaid invoices for years. The longer you wait, the harder collection becomes and the closer you get to losing your legal options.
File a Lawsuit
Filing suit converts your invoice into a court-enforceable judgment. For most small business debts, that means small claims court.
Picking the Right Court
Small claims courts handle cases below a monetary threshold set by each state. The caps vary widely, from $2,500 at the low end to $25,000 at the high end. If your debt exceeds the cap, you’ll file in a higher trial court, which involves more formal procedures and may require an attorney. You generally file where the debtor lives or does business, or where the contract was performed. Many service agreements name a specific jurisdiction, so read your contract.
Filing and Serving the Debtor
You start the case at the court clerk’s office or through the court’s online filing portal by submitting a complaint describing the debt and the amount owed. Filing fees vary by state and claim size, generally running from $30 to $200. Once the court assigns a case number, you must formally notify the debtor by serving them with the summons and complaint. A professional process server or the local sheriff handles this, generally for $20 to $100 per attempt.
Proof of service, a sworn statement from the person who delivered the documents, must be filed with the court. Without it, the case cannot move forward. At the hearing, bring your full documentation: contracts, invoices, delivery confirmations, communications, and the demand letter. If the debtor doesn’t appear, you can usually obtain a default judgment.
Interest on the Debt
Your contract may entitle you to charge interest on the unpaid balance from the date payment was due. Even without a contractual interest clause, most states allow creditors to collect pre-judgment interest at a statutory rate once suit is filed. Rates vary and can run from around 5% to over 12% annually. After a court enters judgment, post-judgment interest accrues on the judgment amount. In federal court, the post-judgment rate is tied to the weekly average one-year Treasury yield.5United States Courts. 28 USC 1961 – Post Judgment Interest Rates State courts set their own rates, which differ considerably.
Collect on the Judgment
Winning does not put money in your account. The court declares you’re owed a sum, and then nothing happens on its own. You have to find the debtor’s assets and use enforcement tools to seize them.
Debtor Examination
If you don’t know where the debtor banks or works, request a debtor examination, sometimes called a judgment debtor exam or supplementary proceeding. The court orders the debtor to appear and answer questions under oath about income, bank accounts, real estate, vehicles, and other assets. You can also require them to produce documents like bank statements and pay stubs. What you learn tells you which enforcement tools will actually produce money.
Wage Garnishment and Bank Levies
With employment and banking information in hand, ask the court to issue a writ of execution, a court order directing the sheriff or marshal to seize funds. For wage garnishment, the writ goes to the debtor’s employer, who withholds a portion of each paycheck until the judgment is satisfied. Federal law caps garnishment for ordinary debts at 25% of disposable earnings, and some states set lower limits. For a bank levy, the writ goes to the debtor’s bank, which freezes and turns over funds up to the judgment amount.
Neither tool works if the debtor has no job or keeps no money in the bank. In that case, you may be able to place a lien on real property the debtor owns. Judgment liens are a long game, but they prevent the debtor from cashing out equity without paying you first.
Write Off a Debt That Cannot Be Collected
If you’ve exhausted your options and the debt is genuinely uncollectible, you may be able to deduct it as a business bad debt. The IRS requires you to show that you previously included the amount in gross income and that you took reasonable steps to collect before concluding the debt was worthless.6Internal Revenue Service. Topic No 453 Bad Debt Deduction You don’t necessarily need a court judgment to prove worthlessness, but you do need documentation showing the debt has no realistic chance of repayment.
There’s a catch for freelancers and many small businesses: if you use cash-basis accounting, you generally cannot deduct unpaid invoices as bad debts, because you never reported the income in the first place. The deduction is available to businesses using the accrual method, which records income when earned rather than when paid.6Internal Revenue Service. Topic No 453 Bad Debt Deduction
Accrual-basis businesses can deduct bad debts that are partly or totally worthless during the tax year. Partially worthless debts can be deducted only up to the amount actually written off on your books that year. Totally worthless debts don’t require a formal charge-off, but the IRS recommends making one; if you skip it and the IRS later determines the debt was only partially worthless, you lose the deduction entirely for that year.7Internal Revenue Service. Tax Guide for Small Business Report business bad debts on Schedule C if you’re a sole proprietor, or on the applicable return for your entity type. If you missed the deduction in the year the debt became worthless, an amended return can still claim it.