To collect accounts receivable, start by organizing your contract and invoice records, confirm the statute of limitations has not expired, send a certified demand letter, and escalate through settlement, a collection agency, a lawsuit, and court-ordered enforcement until the balance is paid or written off. Each step builds the evidence and leverage you need for the next one, so skipping ahead usually costs you later.
Pull Your Documentation Together First
Every collection effort rests on your records. Before you contact the debtor, locate the signed contract or purchase order that sets the terms of the sale. Attach the itemized invoices and proof that the goods or services were delivered: signed receipts, shipping confirmations, or completion certificates. These are the documents you will rely on whether you handle the matter yourself, hand it to an agency, or file suit.
Confirm the debtor’s legal identity through business registration records. Whether you are dealing with an individual, a corporation, or an LLC changes who you can pursue and how you serve legal papers. If the debtor is a business entity, find its registered agent, the person designated to accept legal documents for the company. The agent’s address, or the company’s principal place of business, is where formal notices and court filings should go.
Then calculate the total owed: principal balance, contractual interest, and late fees. Many commercial contracts specify a late-payment rate and a flat or percentage-based fee. If your contract is silent on interest, the statutory rate set by your state applies when you later ask a court for prejudgment interest. Rates vary, but many states fall between 5% and 10% per year. Check the math carefully, because overstating the balance can damage your credibility and, in some jurisdictions, your legal position.
Confirm You Still Have Time to Sue
Every state sets a deadline for filing a lawsuit on an unpaid debt. For written contracts the window ranges from as few as three years to as many as 15 or 20 in some states, with most falling between four and six. Once the deadline passes you lose the right to sue, and the debtor can ask the court to dismiss the case outright. Confirm your deadline before spending time or money on recovery.
Certain actions by the debtor can restart the clock. A partial payment, a written acknowledgment of the balance, or a new promise to pay may reset the limitations period in many states, opening a fresh window to file suit.1Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old The rules vary significantly by state, so talk to an attorney in the relevant jurisdiction before relying on a reset.
Send a Formal Demand Letter
A demand letter is your first formal step. Send it by certified mail with a return receipt requested through the United States Postal Service. You get a tracking number and a signed confirmation of delivery, and if the debtor refuses the envelope, the unclaimed piece itself is evidence that you tried. Courts respond well to creditors who can show they gave a clear chance to pay before escalating.
The letter should state the exact amount owed, reference the contract or invoice, and give the debtor a specific deadline to respond, typically 10 to 30 days. Make clear that you will pursue further action if the balance is not paid or a payment arrangement is not reached by that date. Keep a copy of the letter, the certified mail receipt, and the signed return card or electronic delivery confirmation in your file.
Try to Settle
Settlement can happen at any stage: after a demand letter, while an agency is working the account, or during a lawsuit. You offer to accept less than the full balance in exchange for prompt payment, and the debtor avoids the cost and uncertainty of litigation. For many creditors this is the fastest route to recovering at least a portion of an aging receivable.
If you reach a deal, put it in writing before accepting any money. The agreement should state the exact dollar amount the debtor will pay, whether it is a lump sum or installments, the deadline for each payment, and a clear statement that the debt is satisfied once the settlement amount is paid in full. Include a mutual release of claims so neither side can reopen the matter. The agreement should also specify that if the debtor misses any payment deadline, the full original balance becomes due again.
Hand It to a Collection Agency
When your own efforts stall, a professional collection agency can take over. You turn over your contracts, invoices, and correspondence, and the agency contacts the debtor on your behalf. Most work on contingency: nothing upfront, and the agency keeps a percentage of what it recovers, commonly between 25% and 50% depending on the age and size of the debt. Some offer a flat fee for smaller accounts.
One legal boundary matters here. The Fair Debt Collection Practices Act (FDCPA) governs third-party collection agencies but generally does not apply to original creditors collecting their own debts.2Federal Trade Commission. Think Your Companys Not Covered by the FDCPA3Office of the Law Revision Counsel. 15 USC 1692c – Communication in Connection With Debt Collection An agency cannot misrepresent the amount owed, falsely threaten legal action it does not intend to take, or imply it is affiliated with a government agency.4Office of the Law Revision Counsel. 15 USC 1692e – False or Misleading Representations The FDCPA covers consumer debts, meaning obligations from personal, family, or household transactions, so purely business-to-business receivables fall outside its scope, though many states have broader rules that reach commercial debts. The agency’s first communication with the debtor must include specific federal disclosures, so give it complete and accurate records.5eCFR. 12 CFR Part 1006 Subpart B – Rules for FDCPA Debt Collectors
File a Lawsuit
When negotiation and collection efforts fail, suing is the next step. Pick the right court based on the amount of your claim. Small claims courts offer a faster, less formal process and do not always require an attorney, but limits vary widely, from around $2,500 in some states to $25,000 in others. For claims above your state’s small claims threshold, you file a complaint and summons in general civil court. Filing fees range from roughly $30 in small claims to several hundred dollars in civil court.
After filing, you must formally serve the debtor. A process server or sheriff delivers the complaint and summons, satisfying the legal notice requirement. The debtor then has a set period, often 20 to 30 days, to file a written response.
If the Debtor Does Not Respond
You can ask the court for a default judgment, which is a ruling in your favor without a trial. Before granting it, federal law requires you to file an affidavit stating whether the debtor is on active military duty. The Servicemembers Civil Relief Act protects active-duty service members from default judgments, and the court cannot enter one without this sworn statement.6Office of the Law Revision Counsel. 50 USC 3931 – Protection of Servicemembers Against Default Judgments You can verify military status through the Department of Defense’s online database. Once the affidavit is filed and the court is satisfied, the judge signs the order and the debt becomes an enforceable legal obligation.
If the Debtor Fights the Claim
If the debtor files an answer, the case moves into discovery, possible motions, and eventually a trial or settlement conference. This can take months or longer depending on the court’s calendar and the dispute’s complexity. Many cases settle before trial once both sides have exchanged documents and sized up each other’s positions.
Enforce the Judgment
Winning does not automatically put money in your account. You still have to use the court’s enforcement tools to collect, and that starts with finding the debtor’s assets and income.
Asset Discovery
Courts allow judgment creditors to compel a debtor to appear and answer questions about income, bank accounts, real estate, vehicles, and other property. In federal court this falls under the rules for discovery in aid of execution.7Legal Information Institute. Federal Rules of Civil Procedure Rule 69 – Execution State courts offer similar procedures, often called a debtor’s examination or supplemental proceeding. The debtor testifies under oath, and failing to appear can bring a contempt order. What you learn guides your next move.
Wage Garnishment
A writ of garnishment lets you intercept a portion of the debtor’s wages or seize funds from a bank account. Federal law caps wage garnishment for ordinary debts at the lesser of 25% of the debtor’s disposable earnings for the week, or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage.8Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment You submit the writ to the local sheriff or court clerk, who serves it on the debtor’s employer or bank. The employer withholds the garnished amount from each paycheck and sends it to you until the judgment is satisfied.
Judgment Liens on Real Property
Recording your judgment in the county land records where the debtor owns real estate creates a lien on that property. The lien usually has to be paid before the debtor can sell or refinance, which gives you real leverage. Recording fees are modest, commonly between $10 and $100 depending on the jurisdiction. A judgment lien stays in effect for a set number of years, often 5 to 20 depending on the state, and can usually be renewed.
If the Debtor Files Bankruptcy, Stop
A bankruptcy filing triggers an automatic stay, a federal court order that halts lawsuits, wage garnishments, phone calls, demand letters, and every other attempt to collect a pre-filing debt.9Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay All collection activity must stop immediately. Continuing after you know about the bankruptcy carries serious consequences: a creditor who willfully violates the stay may be ordered to pay the debtor’s actual damages, attorney fees, costs, and in some cases punitive damages.
To preserve your right to payment from the bankruptcy estate, file a proof of claim, which is the formal document asserting how much the debtor owes you and why. In a Chapter 7 or Chapter 13 case, nongovernmental creditors generally have 70 days from the bankruptcy filing date to submit this form.10Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 3002 – Filing Proof of Claim or Interest Miss the deadline and you can lose your claim entirely. The proof of claim should include the case number, the total owed as of the filing date (principal, interest, and fees), the basis for the debt, and copies of supporting documents like contracts and invoices.
Writing Off What You Can’t Collect
When a receivable becomes genuinely uncollectible, you may be able to deduct it as a business bad debt. Federal tax law allows a deduction for any debt that becomes wholly worthless during the tax year, and the IRS permits a partial deduction when a debt is recoverable only in part.11Office of the Law Revision Counsel. 26 USC 166 – Bad Debts To qualify, the amount must already have been included in your gross income, which is typically the case for accounts receivable if you use the accrual method. Cash-basis taxpayers generally cannot deduct unpaid invoices, because the income was never reported in the first place.12Internal Revenue Service. Topic No. 453 – Bad Debt Deduction
You have to show that you took reasonable steps to collect before writing the debt off. Going to court is not always required. If you can show that a court judgment would be uncollectible (for example, the debtor has no assets and has disappeared), that may be enough. Take the deduction in the year the debt becomes worthless, not an earlier or later year.