Key Takeaways:

  • Failure to make payment can result in legal action: Understand the importance of timely payment in contracts to avoid legal consequences.
  • Determine your damages: Evaluate the cost of legal action and whether it's worth pursuing based on the damages owed.
  • Analyze the other party’s finances: Assess the financial health of the party who owes you money to determine if they can repay or if debt collection is a better route.
  • Make a formal demand: Send a demand letter to the other party outlining the amount owed and consequences for non-payment.
  • Filing a lawsuit: Understand the formal process, including filing a complaint and seeking asset seizure if needed.
  • Obtaining judgment: Be aware of the three types of judgments: default, summary, and trial-based judgments.

Legal Action for Non Payment

Legal action for non payment is common in contract disputes. For example, if you own a business, whether big or small, one of the riskiest endeavors is engaging in contracts with other parties and having to trust that the other party will pay you on time under the terms of the contract.

In fact, accounts receivable, which involves the monies you earn for your business, is one of the most important items of consideration when operating your business.

When entering into contracts, you need to ensure that the other party is aware of the payment terms underlying the deal; the other party needs to know when it must pay, how much is owed, and how payment should be made. Otherwise, you run the risk of non-payment. However, if the other party fails to pay, you can bring a legal action for breach of contract. But when bringing this claim, you should identify the amount of damages and likelihood of recovering.

When Legal Action for Non Payment is Necessary

Legal action for non-payment should be pursued only when other options have been exhausted. While negotiating payment terms upfront is the best approach, disputes over non-payment are inevitable in many contracts. Legal action should be considered when:

  • Informal attempts to resolve the issue, such as phone calls or emails, have failed.
  • The non-payment is due to an unwillingness or breach of contract rather than financial hardship.
  • The value of the debt justifies the legal cost and effort involved. If non-payment is ongoing, failure to make payment will result in legal action to recover damages or enforce the contract.

Determine Your Damages

Before you bring a legal suit for non-payment, you will want to determine whether or not it is worth the cost of the legal expenses associated with bringing the suit. How much do you expect to pay to hire an attorney and litigate the suit? Will such expenses be more than what the other party owes you? When making this determination, you will need to also understand what your damages are. Are you simply suing for repayment? Or are you also suing for additional monetary damages? Is the other party struggling financially? These are all important considerations when determining whether or not to bring legal suit for non-payment.

Assessing the Full Impact of Non-Payment

When considering legal action for non-payment, it’s essential to assess all damages, not just the original debt. These may include:

  • Interest on the debt: Depending on your agreement or local laws, you may be entitled to interest on overdue amounts.
  • Additional costs: Legal fees, court costs, and other expenses associated with taking legal action.
  • Consequential damages: These include losses suffered due to the non-payment, such as lost business opportunities or reputational damage.
  • Punitive damages: In some cases, courts may award additional damages if the non-payment is deemed willful or malicious.

Analyze the Other Party’s Finances

Take a look at the invoice that the breaching party failed to pay; did the customer purchase goods or services? Take a look at the other business’s financial health. You can do this by analyzing the following factors:

  • Cash equity
  • Liquid inventory
  • Fixed assets
  • Real property
  • Stocks & bonds
  • Debts

If you are dealing with a customer who is dealing with poor financial health, i.e. insolvent or bankrupt, then you might want to try selling the debt to a debt collection agency and simply moving on from the issue. 

Strategies for Assessing the Other Party’s Ability to Pay

Before proceeding with a lawsuit, it’s critical to analyze the financial situation of the party who owes you money. If the party is financially distressed, even a favorable judgment may not result in payment. Consider these strategies:

  • Credit Reports: Obtain a credit report to assess the other party’s outstanding debts, payment history, and current financial obligations.
  • Asset Searches: Research the defendant’s assets, including real estate, vehicles, and business holdings, which may be subject to seizure or liquidation in the event of a judgment.
  • Bankruptcy filings: Check if the other party has filed for bankruptcy, which may impact your ability to collect on the debt even after a judgment.

Understanding the financial viability of the other party can help you decide whether to move forward with legal action or pursue debt collection alternatives.

Make a Formal Demand

If you determine that you do want to bring legal action, you can begin the process by drafting a formal demand letter and sending it to the other party, regardless of whether it is a person or business. The following should be included in the demand letter:

  • Include how the other party is in default, i.e. unpaid invoice
  • Include how much is outstanding and owed
  • Demand payment of the outstanding amount, i.e. immediate repayment or require that payment must be made by or before a certain date
  • Include language as to the fact that you will continue with a formal legal suit if payment isn’t made by the due date

Creating an Effective Demand Letter

A well-crafted demand letter is essential to formalize your request for payment before pursuing legal action. Ensure your letter is clear, professional, and legally sound by including the following:

  • Debt description: Clearly outline the original contract terms, the unpaid invoice or obligation, and the amount outstanding.
  • Payment terms: State when the payment must be made and any penalties for late payment (if applicable).
  • Legal consequences: Mention that failure to make payment will result in legal action, including filing a lawsuit and potentially seeking asset seizure.
  • Communication channel: Provide clear contact information for the recipient to discuss or dispute the debt.

A demand letter can often prompt the other party to pay in order to avoid the inconvenience and expense of legal proceedings.

Filing a Lawsuit

This will generally include the initial filing of a complaint in a court that has jurisdiction. After you file the complaint, you can seek relief. For example, you can apply for a writ of attachment immediately after filing the complaint, which will ask the court to either place a lien on the defendant’s assets or allow you to take total control over such assets, particularly if they were identified as collateral in the initial written agreement between you and the defendant.

You can also use the discovery process as a means of gathering evidence and locating the defendant’s assets so you can understand what type of assets the defendant has for seizure.

Steps to Filing a Lawsuit for Non-Payment

If a formal demand does not lead to payment, the next step is filing a lawsuit. Here are key actions involved:

  1. Choose the appropriate court: File your lawsuit in the correct court based on the amount of money owed and the location of the parties involved. Small claims courts can be faster and less costly for smaller debts.
  2. File the complaint: Your complaint should detail the contract, the amount owed, the breach of contract, and the remedy you are seeking.
  3. Serve the defendant: Once the complaint is filed, you must formally serve the defendant with the lawsuit. This informs them of the legal action and gives them a chance to respond.
  4. Discovery process: Through discovery, you can request evidence and documents from the defendant to support your case, such as financial records and payment history.

Obtaining Judgment

There are three types of judgments that might be made, including a default judgment, summary judgment, or judgment after a formal trial has taken place. A default judgment occurs when the defendant fails to answer the complaint or appear in court. A summary judgment will be given if you file a motion for summary judgment asking the judge to simply make a determination that the defendant is in default for not paying, thereby ignoring the need for a trial. Lastly, a judgment can be made after a formal trial has taken place in front of the judge and/or judge and jury.

Types of Judgments and How They Impact Payment

When a lawsuit for non-payment progresses, there are three types of judgments that can be made:

  • Default Judgment: If the defendant does not respond to the lawsuit or fails to appear in court, the judge may issue a default judgment, ordering the defendant to pay the owed amount.
  • Summary Judgment: If the evidence is clear and uncontested, either party may request a summary judgment. This allows the judge to make a ruling without a trial.
  • Judgment After Trial: If the case goes to trial, the judge or jury will consider all the evidence and determine whether the defendant must pay the amount owed.

After judgment, you may need to take additional steps to enforce the judgment, such as garnishing wages or placing a lien on the defendant’s property.

Frequently Asked Questions (FAQ):

1. What is the first step in taking legal action for non-payment?The first step is to assess your damages and determine whether pursuing legal action is worth the costs. If so, send a formal demand letter to the non-paying party.

2. Can I sue for late payment in a contract?Yes, if the other party fails to make payment as agreed upon in the contract, you can file a lawsuit for breach of contract and claim damages.

3. What are the potential costs involved in suing for non-payment?Costs include legal fees, court costs, and potential costs for asset searches or collection efforts. You should weigh these costs against the amount owed.

4. What happens if the defendant doesn't respond to a lawsuit?If the defendant doesn't respond, you may obtain a default judgment in your favor, ordering them to pay the owed amount.

5. Can I collect the judgment if the defendant is bankrupt?If the defendant has filed for bankruptcy, collecting the judgment may be challenging, as bankruptcy can discharge some types of debt. However, you can still explore other methods of enforcement if they are not fully discharged.

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