When a company won’t pay its vendors, the practical answer is to move through a defined sequence: a documented reminder, a formal demand letter, then court, collections, or factoring, with an eye on the statute of limitations and on any bankruptcy filing that would freeze your options. The order matters because each step builds the record the next one depends on, and the deadlines are shorter than most vendors assume.
Start With Reminders, Then a Demand Letter
A polite email or phone call is the right first move. Invoices get lost in accounting queues, and a friendly nudge resolves most oversights. Confirm the client received the invoice, note the amount and due date, and ask when payment will arrive. Keep the tone professional. This message may end up as evidence.
If the first reminder is ignored, follow up within two weeks with something firmer. Attach the invoice, reference the payment terms in the contract, state how many days overdue the balance is, and ask for a specific response date. That second touch establishes a pattern of non-responsiveness that helps you later.
When informal follow-up fails, send a formal demand letter. This is the document that separates casual nudging from a serious collection effort, and it often shakes loose payment from customers who have simply been deprioritizing your invoice. A strong demand letter identifies the contract or purchase order, lists every unpaid invoice with amounts and due dates, states the total balance including any contractual interest, sets a firm payment deadline (10 to 15 business days is typical), and makes clear that you will pursue legal action or hand the debt to collections if the deadline passes. Send it by certified mail so you have proof of delivery.
Build the File Before You Need It
Gaps in your records become gaps in your case. Pull the following together early:
- The contract or service agreement showing payment terms, due dates, and any late-fee provisions.
- Every unpaid invoice tied to the debt, with the purchase orders that authorized the work.
- Proof of delivery or completion: signed receipts, shipping confirmations, project sign-offs.
- A communication log in chronological order, including the demand letter and the certified mail receipt.
The communication log is the piece most vendors neglect, and it matters more than people expect. A judge or arbitrator wants to see that you made reasonable efforts to resolve the dispute before filing suit. A clean timeline of ignored reminders and broken promises does that work for you.
Watch the Statute of Limitations
Every state sets a deadline for filing a breach-of-contract claim, and once that window closes you lose the right to sue regardless of how strong your case is. For written contracts, the deadline ranges from three years in some states to ten or more in others. Oral agreements usually have shorter windows. The clock generally starts running on the date of the breach, which for an unpaid invoice is typically the day after payment was due.
Don’t assume you have years. Both Texas and California give you four. If your contract has a choice-of-law clause specifying a particular state’s law, that state’s deadline applies. Check early so informal negotiations don’t eat up the window.
Taking the Debt to Court
When demand and negotiation fail, a lawsuit is the next step. Which court you file in depends mostly on the amount at stake.
Small Claims Court
For smaller debts, small claims court is fast and cheap and doesn’t require a lawyer. Dollar limits vary widely, from as low as $2,500 to as high as $25,000, with most states falling between $5,000 and $10,000. Filing fees are modest and hearings are typically scheduled within weeks. You present the invoices, contract, and communication log to a judge who decides on the spot. Some jurisdictions restrict businesses from filing in small claims court or set a lower cap for business plaintiffs, so check the local rules first.
Civil Lawsuit for Breach of Contract
Debts above the small claims limit require a formal civil suit: hire an attorney, file a complaint, go through discovery, and potentially try the case. It’s slower and more expensive, but it’s the only route for larger balances. Your attorney files a breach-of-contract claim showing that a valid contract existed, you performed, the other side didn’t pay, and you suffered damages. If your contract includes a provision shifting attorney fees to the loser, that moves some of the financial risk off you.
Collecting After You Win
A judgment is a legal declaration that the company owes you money. It is not a check. The court won’t collect for you. Turning a judgment into cash takes additional steps.
The most common enforcement tools are wage garnishment (for individuals or sole proprietors), bank levies that freeze and seize funds in the debtor’s accounts, and property liens that attach to real estate the debtor owns. To use these tools, you typically need a writ of execution from the court, which authorizes a sheriff or marshal to carry out the collection. Judgments remain enforceable for years and can usually be renewed, so even if the debtor has no assets today, you can pursue collection later when their circumstances change.
If the debtor is a business with no obvious assets, a debtor examination may be available. That’s a court-ordered hearing where the debtor must disclose income, bank accounts, and property under oath, giving you a target list for your collection efforts.
Collection Agencies and Factoring
Lawsuits aren’t the only path. Two alternatives let you recover money without going to court.
Collection Agencies
Collection agencies work on contingency, taking a percentage of what they recover and charging nothing upfront if they fail. Commercial contingency fees commonly run from 15% to 50%, climbing as the debt ages or shrinks. A $50,000 invoice that’s 60 days overdue costs less to collect than a $5,000 invoice that’s been outstanding a year.
One point worth knowing for business-to-business debts: the Fair Debt Collection Practices Act, which restricts how collectors can contact debtors and imposes various consumer protections, applies only to debts incurred for personal, family, or household purposes. It does not cover commercial debt collection at all.1Federal Reserve. Fair Debt Collection Practices Act Compliance Handbook An agency chasing your business invoices operates under fewer federal restrictions than one chasing consumer credit card debt. Some states impose their own rules on commercial collectors, but FDCPA protections won’t be among them.
Invoice Factoring
If you need cash now and can’t afford to wait, invoice factoring lets you sell unpaid invoices to a third-party company at a discount. The factor advances a percentage of the invoice value upfront, typically 85% to 95%, and takes over collection from your customer. Once they collect, they pay you the remaining balance minus their fee, which generally runs 1% to 5% for the first 30 days. Factoring is not a loan. It’s a sale of your receivable. You get immediate cash flow and give up a slice of the invoice.
Protect Future Sales With UCC Filings
If you regularly extend credit by delivering goods before being paid, a UCC-1 financing statement protects you before trouble starts. Filing a UCC-1 with the secretary of state in the debtor’s jurisdiction registers your security interest in the goods you’ve sold on credit. If the customer later becomes insolvent or files bankruptcy, you’ll be treated as a secured creditor rather than an unsecured one, which dramatically improves your odds of getting paid.2LII / Legal Information Institute. UCC Financing Statement
Vendors who supply inventory or raw materials should pay particular attention to purchase money security interests. A PMSI gives you priority over other secured creditors in the specific goods you supplied, even if those other creditors filed first. For inventory, this requires notifying existing secured creditors before delivery. For other goods, you have 20 days after the buyer takes possession to file your financing statement and still claim priority.3Legal Information Institute (LII) / Cornell Law School. UCC 9-324 Priority of Purchase-Money Security Interests The filing itself is inexpensive. The step most vendors skip is getting the security agreement signed before shipping starts. Once a customer stops paying, it’s too late to negotiate collateral.
If the Customer Files for Bankruptcy
A bankruptcy filing changes everything. The moment a company files a petition under the Bankruptcy Code, an automatic stay takes effect and stops all collection activity. You cannot call the debtor, send demand letters, file or continue a lawsuit, or take any other action to collect outside of the bankruptcy proceeding.4Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Violating the stay can expose you to sanctions, so stop all collection efforts the moment you learn of a filing.
File a Proof of Claim
To recover anything through the bankruptcy case, you must file a proof of claim with the bankruptcy court. The court sets a specific deadline, called the bar date, and missing it typically means you get nothing. In most Chapter 7 and Chapter 13 cases, creditors have 70 days from the date initially set for the meeting of creditors to file their proof of claim.5Legal Information Institute (LII) / Cornell Law School. Federal Rules of Bankruptcy Procedure – Rule 3002 The court sends you a notice with the exact date. File early.
Where Trade Vendors Sit in Line
Bankruptcy pays creditors in a strict order set by federal law. Secured creditors with collateral get paid first from the value of that collateral. After that, the Bankruptcy Code lists ten tiers of priority claims, beginning with domestic support obligations and administrative expenses and continuing through employee wages and taxes.6Office of the Law Revision Counsel. 11 USC 507 – Priorities Most trade vendors are general unsecured creditors, below all of those priority tiers, splitting whatever remains. That often means pennies on the dollar, or nothing.
The 20-Day Rule for Recent Shipments
One important exception can move a vendor up the line. If you shipped goods to the debtor in the ordinary course of business and those goods were received within 20 days before the bankruptcy filing, the value of those goods qualifies as an administrative expense claim.7Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses Administrative expenses sit near the top of the priority ladder and are paid ahead of general unsecured claims.6Office of the Law Revision Counsel. 11 USC 507 – Priorities Pull your delivery records as soon as you learn about the filing. If any shipments fall within that 20-day window, assert the claim promptly.
Reclaiming Goods You Delivered
A vendor that shipped goods to an insolvent buyer may have the right to demand the goods back entirely rather than wait on the bankruptcy process. Under the Bankruptcy Code, a seller who shipped goods in the ordinary course of business to a debtor that was insolvent at the time of receipt can reclaim those goods if the debtor received them within 45 days before the bankruptcy filing. The seller must make a written reclamation demand no later than 45 days after the debtor received the goods, or within 20 days after the bankruptcy case begins if the 45-day period expires after filing.8Office of the Law Revision Counsel. 11 USC 546 – Limitations on Avoiding Powers Even if you miss the reclamation deadline, you can still assert the 20-day administrative expense claim above. Review shipping records, calculate dates, and get a written demand out immediately.
Writing the Loss Off on Taxes
Once you’ve exhausted collection options and the debt is genuinely uncollectible, you may be able to deduct it as a business bad debt. Eligibility turns on your accounting method.
An accrual-method business already recorded the unpaid invoice as income when it was earned. Because the amount was included in income, you can deduct it as a bad debt when it becomes partially or totally worthless.9Internal Revenue Service. Tax Guide for Small Business For a partially worthless debt, your deduction is limited to the amount you actually charge off on your books during the tax year. For a totally worthless debt, you can deduct the entire remaining balance.
A cash-method business generally cannot deduct an unpaid invoice because the amount was never included in income to begin with. You can’t deduct money you never reported receiving.10Internal Revenue Service. Topic No. 453 – Bad Debt Deduction Cash-method businesses can still deduct bad debts arising from actual cash loans made for business purposes, but an unpaid invoice for services rendered doesn’t qualify.
No single event automatically proves a debt is worthless. The IRS looks at the totality of the circumstances: the debtor’s financial condition, whether they’ve entered bankruptcy, whether they’ve stopped responding to collection attempts, and whether legal action would realistically produce a result. Document your collection efforts thoroughly. That record is what supports the deduction if the IRS questions it.