To collect accounts receivable, work through a set sequence: organize your contracts and invoices, confirm you are still within the statute of limitations, send a certified demand letter, escalate to a collection agency or negotiated settlement, and — if the balance still is not paid — file suit and use the court’s enforcement tools to garnish wages or place a lien on property. Each step builds the record for the next, so skipping ahead usually costs you leverage later.
Get Your Paperwork in Order
Every collection effort rests on the strength of your file. Before you contact the debtor about payment, pull the signed contract or purchase order, 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 hand to a collection agency or attach to a court complaint.
Confirm the debtor’s legal identity next. Business registration records tell you whether you are dealing with an individual, a corporation, or an LLC, and that determines who you can pursue and where legal papers must go. For a business entity, find the registered agent listed with the state; that address, or the principal place of business, is where your formal notices and any lawsuit will be served.
Then calculate what is actually owed. Add the principal balance, any contractual interest, and any late fees the contract allows. If your contract is silent on interest, the statutory rate set by your state applies when you later ask a court for prejudgment interest; many states fall in the 5% to 10% per year range. Get the math right the first time. Overstating the balance in a demand letter damages your credibility and, in some jurisdictions, your legal position.
Check the Statute of Limitations Before You Spend Money
Each state sets its own deadline for suing on an unpaid debt. For written contracts the window runs from as few as three years to as many as 15 or 20 years in some states, though most sit between four and six. Once the deadline passes you cannot sue, and the debtor can move to dismiss any case you try to file.
Some debtor actions can restart the clock. A partial payment, a written acknowledgment of the balance, or a new promise to pay may reset the statute of limitations in many states.1Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old Rules vary by state, so check with an attorney in the debtor’s jurisdiction before relying on a reset.
Send a Formal Demand Letter
The demand letter is your first formal step. Send it by certified mail with return receipt requested through the United States Postal Service, which gives you a tracking number and a signed delivery confirmation. If the debtor refuses the letter, the unclaimed envelope itself is evidence you tried. Courts look favorably on creditors who can show they gave the debtor a clear opportunity to pay.
State the exact amount owed, reference the contract or invoice number, and give the debtor a specific deadline to respond, commonly 10 to 30 days. Say plainly 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 receipt card together in your file.
Bring in a Collection Agency
When your own follow-up stops working, a collection agency takes the account off your desk. You hand over your contracts, invoices, and correspondence, and the agency contacts the debtor. Most agencies work on contingency: nothing upfront, and the agency keeps a percentage of what it recovers, commonly 25% to 50% depending on the debt’s age and size. Some offer a flat fee for smaller accounts.
A 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 The FDCPA also targets consumer debts — obligations arising from personal, family, or household transactions — so purely business-to-business receivables sit outside its scope, though many states have broader rules that reach commercial debts.
Once an agency takes over, its initial communication with the debtor must include specific disclosures required by federal regulation: that the communication is an attempt to collect a debt, the amount owed, the name of the creditor, and the debtor’s right to dispute the debt within 30 days.4eCFR. 12 CFR Part 1006 Subpart B – Rules for FDCPA Debt Collectors Giving your agency complete, accurate records up front helps them meet those requirements.
Credit Reporting as Leverage
You or your agency can report the delinquent account to consumer credit reporting agencies, which creates a strong incentive to pay. If you report, federal law requires the information to be accurate and prohibits reporting data you know is wrong.5Office of the Law Revision Counsel. 15 USC 1681s-2 – Responsibilities of Furnishers of Information to Consumer Reporting Agencies When you refer an account for collection and notify a credit reporting agency, you must report the date the delinquency began within 90 days.6Federal Trade Commission. Consumer Reports – What Information Furnishers Need to Know A delinquent account generally stays on the debtor’s credit report for seven years from that date.
Settle When It Makes Sense
Settlement can happen at any stage: after the demand letter, while an agency works the account, or once a lawsuit is on file. You 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 part of an aging receivable.
Put the agreement in writing before you accept any money. The document should include 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. Add a mutual release of claims so the matter cannot be reopened. If the debtor misses any payment deadline, the agreement should specify that the original balance becomes due again.
File a Lawsuit for the Balance
When negotiation and collection efforts fail, filing suit is the next step. Pick the right court based on the amount of your claim. Small claims courts are faster and less formal and often do not require an attorney, but jurisdictional limits vary widely, from $2,500 in some states to $25,000 in others. 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, 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.
Default Judgment When the Debtor Ignores the Suit
If the debtor does not respond in time, you can ask the court for a default judgment. Before entering one, 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 that sworn statement.7Office 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 on file and the court is satisfied, the judge signs the order and the debt becomes an enforceable legal obligation.
If the Debtor Answers
If the debtor files an answer, the case moves into discovery, motions, and eventually a trial or settlement conference. Many contested cases settle before trial once both sides have exchanged documents and taken a hard look at their positions.
Collect on the Judgment
A judgment on paper is not money in your account. You have to use the court’s enforcement tools, and that starts with finding out what the debtor has.
Asset Discovery
Courts let judgment creditors 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 general rules for discovery in aid of execution.8Legal Information Institute. Federal Rules of Civil Procedure Rule 69 – Execution State courts have similar procedures, often called a debtor’s examination or supplemental proceeding. The debtor testifies under oath, and failing to appear can result in a contempt order.
Wage and Bank Garnishment
A writ of garnishment lets you intercept a portion of the debtor’s wages or seize funds directly 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.9Office 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 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 against that property. The lien generally must be paid off before the debtor can sell or refinance, which gives you real leverage. Recording fees are modest, often $10 to $100 depending on the jurisdiction. A judgment lien stays in effect for a set number of years, commonly 5 to 20 depending on the state, and can usually be renewed.
If the Debtor Files Bankruptcy, Stop and File a Claim
A bankruptcy filing triggers an automatic stay, a federal court order that halts lawsuits, wage garnishments, phone calls, demand letters, and any other attempt to collect a pre-filing debt.10Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay All collection activity must stop immediately once you know about the bankruptcy. A creditor who willfully violates the stay can 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, 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 file it.11Legal 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. Include the case number, the total owed as of the filing date (principal, interest, and fees), the basis for the debt, and copies of the contract and invoices.
Write Off What You Cannot Collect
When a receivable is 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.12Office of the Law Revision Counsel. 26 USC 166 – Bad Debts The amount must have already been included in your gross income, which is typically the case for receivables under the accrual method. Cash-basis taxpayers generally cannot deduct unpaid invoices because the income was never reported in the first place.13Internal Revenue Service. Topic No. 453 – Bad Debt Deduction
You need to show reasonable collection efforts before writing the debt off. A court judgment is not always required. If you can demonstrate that any 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 earlier or later.
If you cancel or forgive $600 or more of a debt owed to you, you may also need to file Form 1099-C with the IRS to report the cancellation.14Internal Revenue Service. About Form 1099-C – Cancellation of Debt The debtor typically has to report the canceled amount as income, which is worth keeping in mind during settlement talks. A debtor who understands the tax consequence may push harder on the settlement figure.