What Should I Do When a Client Won’t Pay?

Any business, whether it is online or otherwise, will inevitably run into a situation where a client refuses to pay a debt owed to your business. How you respond may depend on the amount of the debt, type of debtor and specific regulations in the State or Territory in which you are seeking the money.

Some people have great difficulty asking for payment, even though they know the money is owed. If this is you, create a process that you can follow, or delegate to someone else to follow, to avoid the emotional hesitation attached to asking for money.

You might create a fictional admin person in your business with their own alias and email address and use that identity to follow up payment if it is confronting for you to do it by yourself. If you use a system like Xero or MYOB, you should be able to set up automated reminders in that system so you don’t have to do it manually. 

Although the process varies, the general outline for collecting on money owed is as follows:

1. Follow up

A quick, non-judgemental phone call might be your quickest way to get paid. It is possible that someone has simply forgotten to pay your invoice.

Follow up with a polite reminder within seven days of the overdue date. If you get no response, you can either call to ask about when the debt will be paid, or follow up with a slightly less friendly reminder.

Keep a record of all communications, whether via email, post or telephone. If reminders and phone calls don’t get a response, persist with a more personal form of communication, like a phone call. 

2. Letter of Demand

Whether you are seeking to recover a debt from an individual or from a company, start with a Letter of Demand. The Letter of Demand states that the company or individual has until a certain date to pay the debt. It also explains that failure to pay by that date allows you to initiate legal proceedings to collect the debt (usually without any further notice). The Letter of Demand is the customer’s last chance to pay on the debt, and it shows the court that you attempted to collect the debt before going to court.

3. Statutory Demand

If the debtor is a company, a Statutory Demand can be used if the company owes more than $2,000. The Statutory Demand gives the company 21 days to pay. You must make this type of demand to trigger the appointment of a liquidator or administrator to the winding up of the company if the company fails to respond within the 21 days. A Statutory Demand is a specific legal form and if there is no response, means that the company is presumed insolvent. You will need legal help to manage the specific legal requirements of this process. You don’t want to start out and get it wrong. There are very specific rules and time frames involved in that process.

Once the time limit on a Statutory Demand expires, that demand stays in place until the debt is paid and you can use the failure to respond to start court action to wind up the company. The whole process of getting to hearing of the application costs upwards of $7,000 on average and there is no guarantee that you will recover the funds you owed on top of that cost. So think carefully before starting this process.

4. Going to Court

If the customer does not respond to your demand letters, then the next step is to initiate legal proceedings. These proceedings vary a great deal depending on the type of debt and the debtor. Please contact us to discuss you situation.

5. Collecting on a Judgement

If you have won in court, you probably won’t just get paid. You are more likely to need to take steps to enforce your judgement. So, where the Court has made an order that the other party pay you an amount of money within a certain time frame and they don’t, you have to go back to the Court to take further steps to make them pay.

Your customer might be ordered to attend court and explain their financial situation and why they haven’t paid.  It is possible to get an order that a sheriff seize your customer’s property and sell it to pay you, although this is uncommon.  The court could also issue an order where the customer’s funds (including wages) are garnished and given to you instead—this includes accounts payable if the customer is a company.

REMEMBER: ALWAYS KEEP GOOD RECORDS OF ALL COMMUNICATIONS AND ANY PAYMENTS THAT ARE OWED TO YOU TOGETHER WITH ANY STEPS THAT YOU TAKE TO ATTEMPT TO COLLECT THE DEBT. THESE RECORDS WILL BE HELPFUL SHOULD YOU NEED TO USE THE COURT TO COLLECT ON A CUSTOMER DEBT.