To collect payment from customers who don’t pay, you build a documented case, escalate through a formal demand letter, and if that fails, hand the debt to a collection agency or take it to court, where a judgment can be enforced through wage garnishment, a bank levy, or a lien on the customer’s property. Each step depends on the one before it. Skipping the paperwork weakens the demand letter; skipping the demand letter weakens the lawsuit; and a lawsuit filed after the statute of limitations has expired collects nothing at all.
Pull Your Documentation Together First
Before you contact the customer about legal action or draft anything on letterhead, gather every record that proves the debt exists and is overdue. A demand letter or court claim without supporting paperwork rarely survives a serious challenge.
At a minimum, collect the signed contract or agreement showing what the customer agreed to pay and on what terms, itemized invoices with dates and amounts, proof of delivery or completion, and any correspondence in which the customer acknowledged the balance or asked for more time. Emails and texts count. So do voicemails you can preserve.
Confirm the debtor’s exact legal name as it appears on the signed agreement. If the customer is a business, you need the legal entity name, not a trade name, for any court filing. Verify that each invoice states a clear due date so you can pinpoint when the account became delinquent. A single organized file will serve you at every later stage.
Send a Formal Demand Letter
Once phone calls and email reminders have gone unanswered, a formal demand letter shifts the tone from follow-up to notice. It creates a written record of your good-faith effort to resolve the dispute, and many courts want to see that record before they’ll hear a case.
Your letter should state the exact amount owed, broken out into the original balance, any contractual late fees, and any interest accrued under the terms of your agreement. Give a specific deadline, typically 10 to 14 days from the date of the letter, for payment in full or a workable payment arrangement. State plainly that you intend to pursue legal action, including a court claim, if the deadline passes without payment. Include a phone number and mailing address so the customer can respond.
Send it by certified mail with return receipt requested. The signed return receipt card prevents the customer from later claiming they never got notice. Keep a copy of the letter, the mailing receipt, and the returned card together in your file. Apply only the late fees and interest rates your contract actually specifies. Courts will not enforce charges that weren’t agreed to in writing, and any rate in your contract has to comply with your state’s usury cap.
Consider a Collection Agency
If the demand letter produces nothing, a third-party collection agency is a common intermediate step before a lawsuit. Agencies specialize in locating hard-to-reach debtors and applying consistent pressure to collect. Many business owners hand a debt off once it’s 90 or more days past due and internal efforts have stalled.
Most agencies work on contingency: they take a percentage of what they recover and you pay nothing if they collect nothing. Rates generally run 25 to 50 percent of the amount collected, with the higher end reserved for older or more difficult debts. Some charge flat fees on smaller balances. Before hiring anyone, verify that the agency is licensed and bonded as required in your state, and ask whether it reports to the credit bureaus. A credit report entry often motivates payment when letters and phone calls have not.
Once you hand a debt to an agency, that agency becomes a “debt collector” under federal law and must follow the Fair Debt Collection Practices Act. Choosing a reputable one matters, because aggressive or illegal tactics can expose you to complaints and potential liability.
Watch the Statute of Limitations
Every state sets a deadline for filing suit to collect a debt. Once it passes, the customer can ask the court to dismiss the case no matter how much they owe. For debts based on written contracts, the window typically runs from three years in the strictest states to ten years in the most generous. The clock generally starts on the date payment was first missed.
Certain actions by the debtor can restart that clock. A partial payment or a written acknowledgment of the debt, sometimes even after the original deadline has expired, may reset the statute of limitations in many states and give you a new window to sue.1Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt That’s Several Years Old Written contracts generally get longer windows than oral agreements or open-ended accounts. If your deadline is approaching and collection has stalled, talk to an attorney about filing before it closes.
File a Claim in Small Claims Court
When demand letters and agency work fail, small claims court is the streamlined path to a judgment. Most small claims courts are designed for modest amounts and let you represent yourself.
Dollar Limits and Filing Fees
Each state caps what you can recover in small claims. Limits range from $2,500 in the most restrictive states to $25,000 in the most generous, with most falling between $5,000 and $10,000. If your debt exceeds the cap, you’ll have to file in a higher civil court, which involves more formal procedures and often an attorney.
You file in the correct court, generally the county where the customer lives or where the transaction took place. Filing fees typically range from $30 to $200 depending on claim size and local rules. Once you pay, the clerk issues a summons and a claim form for you to complete.
Service and the Hearing
The customer must be formally notified through service of process. You can hire a professional process server for $20 to $100, or in many places ask the local sheriff’s office to handle it. The customer then has a set period, commonly 20 to 30 days, to file a written response.
If the customer never responds or fails to appear, you can request a default judgment. If they do show up, come with your file: the signed contract, itemized invoices, proof of delivery, the demand letter, and the certified mail receipt. Many courts offer mediation before the hearing, which can produce a negotiated settlement recorded as an enforceable order.
When the Debt Is Too Large for Small Claims
If the amount exceeds your state’s small claims cap, you file in a general civil court, sometimes called district or superior court. These courts handle larger claims under more formal procedures: written pleadings, discovery, pre-trial motions, and potentially a trial with rules of evidence. Filing fees are higher and the process takes longer. For balances well above the cap, hiring an attorney is usually practical, and many business litigation lawyers work on contingency or hybrid fee arrangements for collection cases. A demand letter on law firm letterhead sometimes prompts payment before a suit is even filed.
Enforcing a Money Judgment
Winning does not put money in your account. The judgment declares that the customer legally owes you a set amount, but you have to take further steps to collect. If the debtor doesn’t pay voluntarily, you have several enforcement tools.
Wage Garnishment
A wage garnishment orders the debtor’s employer to withhold part of each paycheck and send it to you until the judgment is paid. Federal law caps the garnishable amount at the lesser of 25 percent of disposable earnings for the week, or the amount by which those earnings exceed 30 times the federal minimum wage of $7.25 per hour, protecting $217.50 per week.2Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment The “whichever is less” rule means a low-wage worker may have very little garnished, or nothing at all. Some states impose stricter limits than the federal floor.
To start, you obtain a writ of garnishment from the court clerk and have it served on the employer. The employer must comply and continue withholding until the judgment is satisfied or the court orders otherwise.3U.S. Department of Labor. Garnishment
Bank Levy
A bank levy freezes and seizes funds directly from the debtor’s checking or savings accounts. You get a writ of execution from the court identifying the bank and the accounts. When the bank receives the writ, it freezes the account up to the judgment amount. After a waiting period, often around 21 days depending on the state, the funds are released to satisfy the judgment.
The hard part is locating the accounts. If you’ve received checks from the customer, those checks identify the bank. Otherwise, post-judgment discovery may be needed to force disclosure.
Judgment Lien on Real Property
If the debtor owns real estate, you can record the judgment with the county recorder’s office to place a lien on the property. The lien prevents the debtor from selling or refinancing without paying you first. It typically stays attached for a set number of years, often 10, and accrues interest at a statutory rate that varies widely by state. A lien doesn’t produce cash right away, but it secures your position for when the property eventually changes hands.
Post-Judgment Discovery
If you don’t know where the debtor banks, works, or holds assets, post-judgment discovery lets you compel disclosure. You can send written interrogatories requiring sworn answers about income, accounts, and property. You can also ask the court to order a judgment debtor examination, an in-person questioning under oath at which the debtor may be required to bring bank statements, pay stubs, and tax returns. Failing to appear can trigger contempt of court, fines, or an arrest warrant. Once you know where the assets are, you can target them with a garnishment or levy.
Assets You Can’t Touch
Not everything the debtor owns is available to satisfy your judgment. Every state exempts certain property from creditors. Specifics vary, but most states shield at least some portion of the following:
- Equity in the debtor’s primary residence, under a homestead exemption that ranges from a few thousand dollars to unlimited depending on the state.
- At least one motor vehicle up to a set value.
- Furniture, clothing, appliances, and other household items up to a specified aggregate value.
- Tools of the trade the debtor needs to earn a living, up to a dollar cap.
- Social Security, veterans’ benefits, unemployment compensation, and public assistance, which are generally exempt from garnishment or levy.
- Funds in qualified retirement plans like 401(k)s and IRAs, which typically enjoy substantial protection.
Even a valid judgment may not produce a full recovery if the debtor’s non-exempt assets fall short. Knowing what’s reachable before spending on enforcement saves frustration.
Stay Within the Collection Rules
The Fair Debt Collection Practices Act is the main federal law governing debt collection. If you’re a business collecting money owed directly to you, the FDCPA generally does not apply. The law defines a “debt collector” as someone collecting debts owed to another party and specifically excludes creditors collecting their own debts.4Office of the Law Revision Counsel. 15 USC 1692a – Definitions
There is an important exception. If you use a name other than your own business name in a way that suggests a third party is collecting the debt, you lose the exemption. Sending letters under a fictitious “collections department” name that doesn’t match your actual business can trigger full FDCPA coverage.4Office of the Law Revision Counsel. 15 USC 1692a – Definitions
An agency you hire is squarely covered. The FDCPA prohibits contacting debtors before 8 a.m. or after 9 p.m. local time, threats of violence, calls made repeatedly with intent to harass, and misrepresentations of the amount or legal status of a debt. A debtor subjected to illegal practices can sue for actual damages plus up to $1,000 in statutory damages, along with attorney’s fees and court costs.5Office of the Law Revision Counsel. 15 USC 1692k – Civil Liability
Even if the FDCPA doesn’t cover you as an original creditor, many states have their own unfair debt collection statutes that reach every collector, including the original business. Idle threats, contacting the debtor at work after being told to stop, or discussing the debt with family members can violate state law and expose you to liability. Keeping things professional is a legal safeguard, not just good practice.
Writing Off a Truly Uncollectible Debt
If you’ve exhausted your options and the debt is genuinely uncollectible, you may be able to deduct the loss as a business bad debt on your federal return. The IRS allows the write-off only if the amount was previously included in your gross income, which means you use the accrual method of accounting or you actually loaned cash to the customer.6Internal Revenue Service. Topic No. 453, Bad Debt Deduction If you use the cash method, as most sole proprietors do, you generally cannot deduct unpaid invoices for services because you never reported that income.
To claim the deduction, show that you took reasonable steps to collect and that there is no realistic expectation of repayment. You don’t have to file a lawsuit if you can demonstrate that a judgment would be uncollectible. The deduction is taken in the tax year the debt becomes worthless and is reported on Schedule C for sole proprietors or on the applicable return for other entity types.6Internal Revenue Service. Topic No. 453, Bad Debt Deduction
If you forgive or cancel a debt of $600 or more instead of continuing to pursue it, you may need to file Form 1099-C with the IRS reporting the canceled amount, and the canceled debt may become taxable income to the customer.7Internal Revenue Service. About Form 1099-C, Cancellation of Debt Talk to a tax professional before writing off a significant balance so you handle the reporting correctly and claim the deduction in the right year.