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What to Do When Customers Do Not Pay

Dealing with “deadbeat” clients is truly more an art than a legal service–the law is only a tool–effective if used correctly.
Each situation is different, but this is the method that has been used successfully on behalf of TFL clients in collecting unpaid invoices.

Step 1: Why?

Find out why the customer is not paying.

If there is a clear reason, there is usually a clear solution; where answers to this question is convoluted it gives me the indication this is heading to a higher level of dispute. A caution here though, because sometimes it is due to poor customer service on behalf of the business that makes it difficult to determine the motivation to not paying an invoice; however, that has to do more with preventative risk management.

Step 2: Assess.

There are usually three reasons people do not pay: (1) dissatisfaction, (2) inability, and (3) pure evil (or misc.).

money owedIf the customer is merely dissatisfied with the product or service, then you should work a two-pronged approach: a customer service warm approach and a separate collections cold approach. These types of disputes are most likely to be resolved without legal. Too many “dissatisfied” customers is a huge red flag and is an indication that the product or service lacks quality standards.

Inability to pay is most concerning because it leaves the business with little recourse. If they are unable to pay now, filing a lawsuit is unlikely to make them able to pay later. In this case, continue collection procedures and try to work out a settlement plan that actually results in payments being made. Too many “inability pay” customers is a sign that the business model needs to change in order to mitigate this risk.

This does not happen often for most industries, but sometimes a business will get a bad actor and just not pay because they do not want to. These people are in the pure evil category because they may represent they are dissatisfied or unable to pay, but they are not being honest. These are the types to be most aggressive with. If you are able to determine a bad actor early enough, going straight to a lawsuit may be the best option.

Step 3: Respond

After exhausting business collection procedures (a whole other topic), legal help does come in handy.

Top Floor Legal follows a very simple procedure. [REDACTED]

Step 4: Legal Options

Contracts. Contracts. Contracts.

The legal rights are most likely going to be wrapped up into the contract agreement. This is where it becomes important to have strong contracts. The contract will help determine (1) where you are able to sue, (2) how you are able to file (arbitration or not), and (3) the remedies that are available to you (attorney’s fees, etc.).

Whether it is worth pursuing a legal action is not just economical, i.e. (potential reward * probability of success) – legal costs. Sometimes, businesses are forced to pursue customer collections even where it is not economical because they may be in a close knit industry where laying softly will hurt their future business as well.

Of course, businesses should consider the nonlegal impact. Suing your customers is never an easy thing to do, no matter what. Depending on the industry, the business could face a media and PR backlash.

Nasir Pasha, Esq.

Post by:

Managing attorney and co-host of podcast Legally Sound | Smart Business

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