To collect money from customers who won’t pay, work through a sequence that escalates only as far as it needs to: organize your records, contact the customer directly, offer a written payment plan, send a formal demand letter, hand the account to a collection agency, and, if necessary, file in small claims court and enforce the judgment. Speed is part of the strategy. Accounts more than 90 days overdue see significantly lower recovery rates, and every week you wait weakens both your leverage and your paper trail.
Build the Paper Trail First
Before you contact anyone, pull together the documents that prove the debt. The core piece is the original signed contract or service agreement, which establishes the payment terms the customer agreed to. If there’s no formal contract, a purchase order, signed estimate, or email chain confirming the scope and price can serve the same purpose.
Add itemized invoices showing what you delivered, when, and at what price. Then build a chronological ledger tracking the original balance, any partial payments, and any interest or late fees. One caution on fees: your contract has to explicitly authorize interest or late charges. You cannot add them after the fact.
Verify the customer’s current mailing address, phone, and email. Bad contact data is where most early collection efforts quietly die. Keep everything in a single file. It becomes the backbone of every step that follows, from your first phone call to a possible court filing.
Contact the Customer Directly
Start with a straightforward payment reminder by email, letter, or both. Many overdue invoices are the product of disorganization, not refusal, and a nudge clears more of them than you might expect. If the first reminder gets no response, follow up by phone. Keep the call professional: confirm the invoice was received, ask whether anything about the work is in dispute, and request a specific payment date.
Roughly weekly follow-up calls tend to work. More often reads as harassing; less often lets the customer forget you exist. Log every interaction with the date, time, method, who you spoke with, and what was said. Even a voicemail belongs in the log. That record shows you made a good-faith effort to resolve the balance before escalating, which matters if a judge ever looks at the file.
A legal point worth knowing: as the original creditor collecting your own debt, you are not bound by the federal Fair Debt Collection Practices Act. That law governs third-party debt collectors. Many states, however, have consumer protection statutes that restrict how original creditors can conduct collection activity, including bans on deceptive or abusive tactics. Handle every contact as if a judge will read the transcript later.
Offer a Written Payment Plan
When a customer admits the debt but says they cannot pay the full amount now, a structured payment plan often recovers more money than sending the account to collections. Propose a specific schedule, such as monthly installments over three to six months, and put it in writing. The agreement should state the total balance, the installment amounts and due dates, any interest that keeps accruing, and what happens if a payment is missed.
Both parties sign. A signed payment plan strengthens your legal position if the customer defaults again, because it refreshes the evidence that the debt is valid and acknowledged. Some businesses offer a small discount, in the range of 5 to 10 percent, for customers who commit and follow through. That tradeoff often makes sense when the alternative is a collection agency taking a much larger cut.
Send a Certified Demand Letter
If direct outreach and negotiation fail, send a formal demand letter. It should state the exact balance due, reference the underlying contract and invoices, and set a firm deadline, typically 10 to 15 business days, for the customer to pay or respond. Make clear that you intend to pursue further collection action, whether that means hiring a collection agency or filing suit, if the deadline passes.
Send the letter by certified mail with a return receipt through the U.S. Postal Service. The return receipt requires the recipient’s signature and gives you proof of delivery with a verifiable date. Keep the signed receipt with the rest of your file. It becomes important evidence if you later need to show a court that the customer was warned before you escalated.
Turn the Account Over to a Collection Agency
When your own efforts have not worked, transferring the account to a professional collection agency moves the recovery work to specialists. You hand over your documentation package, and the agency takes over contact with the customer. Most agencies work on contingency, so you pay nothing upfront and the agency keeps a percentage of whatever it recovers. That percentage typically runs from 15 to 50 percent, with newer debts at the low end and older or more difficult accounts commanding higher fees.
Once the account is in agency hands, the Fair Debt Collection Practices Act applies to the agency’s conduct. Collectors cannot call the customer before 8:00 a.m. or after 9:00 p.m. local time, and calling more than seven times in seven days about the same debt creates a legal presumption of harassment.1Office of the Law Revision Counsel. 15 U.S. Code 1692c – Communication in Connection With Debt Collection2Consumer Financial Protection Bureau. When and How Often Can a Debt Collector Call Me on the Phone? Within five days of first contact, the agency must send the customer a written validation notice stating the amount, the creditor’s name, and that the customer has 30 days to dispute the debt in writing.3Office of the Law Revision Counsel. 15 U.S. Code 1692g – Validation of Debts
Stay engaged after the handoff. Expect regular status updates, and require the agency to get your approval before settling for less than the full balance.
File in Small Claims Court
Small claims court is designed for smaller disputes and does not require a lawyer, which makes it practical for unpaid invoices. Dollar limits vary by state, ranging from $2,500 to $25,000, with most caps landing near $10,000. If your debt exceeds the limit, you will need to file in regular civil court, which is costlier and more procedurally complex.
Filing the Claim
Get the complaint form from your local courthouse clerk or the court’s website. You will need the customer’s legal name, your business name, and the exact dollar amount you are claiming. Filing fees vary widely, from about $10 to more than $300 depending on the state, the court, and the size of the claim. The court assigns a case number and schedules a hearing once you file.
Serving the Defendant
After filing, you must formally notify the customer through service of process. You cannot mail the papers yourself. Most jurisdictions require a professional process server, the county sheriff, or another authorized third party to hand-deliver the documents. Service fees typically run from $20 to $180. If service is not done properly, the court will not proceed.
The Hearing
If you win, the court usually lets you recover filing fees and service costs on top of the debt itself. Bring the whole documentation package to the hearing: contract, invoices, ledger, communication log, and the signed certified mail receipt from your demand letter. Judges in small claims court see hundreds of cases, and the business that arrives with organized records has a real advantage.
Enforce the Judgment
A judgment is not a check. The court declares that the customer owes you a specific amount, but collecting on that judgment is on you. This is where a lot of successful lawsuits stall out.
If the customer does not pay voluntarily, you can ask the court to issue a writ of execution, which authorizes a sheriff or marshal to seize nonexempt property or funds. Common enforcement tools include:
- Bank levy, a court order directing the customer’s bank to turn over funds up to the judgment amount.
- Wage garnishment, an order requiring the customer’s employer to withhold part of each paycheck. Federal law caps garnishment for ordinary debts at 25 percent of disposable earnings.4U.S. Department of Labor. Fact Sheet 30 – Wage Garnishment Protections of the Consumer Credit Protection Act
- Property lien, a legal claim against the customer’s real estate. The lien does not force a sale, but it must be paid when the property is sold or refinanced.
Each of these requires a separate court filing, and procedures vary by jurisdiction. For larger judgments, an attorney experienced in judgment enforcement can save time and improve your odds of actually collecting.
Watch the Statute of Limitations
Every debt has a legal shelf life. The statute of limitations sets the window during which you can sue to collect. Once it closes, the customer can raise the expired deadline as a defense and the court will likely dismiss the case. For written contracts, the period runs from 3 to 10 years depending on the state.
The clock generally starts from the date of the last payment or the date the account became delinquent. Here is the important detail: in many states, a partial payment or a written acknowledgment of the debt restarts the entire limitations period. This is called re-aging. It cuts both ways. If a customer makes a small payment on a four-year-old debt in a state with a six-year limitation, you may get a fresh six years to sue from the date of that payment.
Track your dates carefully. If the window is closing and you have not resolved the balance, filing suit before it expires preserves your right to collect. After that, your only leverage is the customer’s willingness to pay voluntarily.
Write Off What You Cannot Collect
When a debt becomes genuinely uncollectible, the tax code lets you recover part of the loss. A business can deduct a bad debt if the debt was created or acquired in connection with the business and has become wholly or partially worthless.5Office of the Law Revision Counsel. 26 USC 166 – Bad Debts You have to show you took reasonable steps to collect before writing it off, which is where your documentation file earns its keep a second time.
The deduction depends on your accounting method. Accrual-method businesses, which record revenue when they invoice, can deduct the uncollectible amount as a bad debt. Cash-method businesses, which record income only when payment is received, generally cannot take a bad debt deduction for amounts they never received, because there is no income to offset.6Internal Revenue Service. Tax Guide for Small Business
For partially worthless debts, your deduction is limited to the amount you charge off on your books that tax year. For wholly worthless debts, you can deduct the full remaining balance without a formal charge-off, though you still need to document why it is worthless.6Internal Revenue Service. Tax Guide for Small Business
If you cancel $600 or more of a customer’s debt, you may also need to file Form 1099-C with the IRS to report the canceled amount.7Internal Revenue Service. About Form 1099-C, Cancellation of Debt That applies when you formally forgive the balance or accept a settlement for less than what is owed. The canceled amount becomes taxable income for the customer, not for you, but the reporting obligation is yours.