It’s one thing if a client pays your most recent invoice a week or two after it’s due; it’s another if you’ve gone months without payment, especially if the invoice is large. If your typical communication channels aren’t succeeding in retrieving your clients’ unpaid debt, you may need to take more formal action.
Debt collection letters should be the first step in your action plan. After you send enough letters, you can transfer the client’s debt to collections, though you may want to exhaust all other options before doing so. Learn more about debt collection letters and the debt collection process below.
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A debt collection letter is a formal debt reminder that you send (or hire a collection agency to send) to a nonpaying client. You can send a debt collection letter to a B2B client (another business) or an individual consumer. It’s estimated that about 70 million Americans have a debt in collections each year, according to the Consumer Financial Protection Bureau, so the problem is more common than you might think.
The first couple of debt collection letters you send to a debtor can be relatively friendly and sympathetic. However, as you send additional debt collection letters, you may need to escalate the language to include warnings of impending legal action.
A debt collection letter reminds a nonpaying client of their debt to you or warns of near-future legal action.
A debt collection letter may serve one, some or all of the following purposes:
A debt collection letter may inform a debtor of their debt, initiate a repayment plan, preview impending legal proceedings or combine these tasks.
A debt collection letter should include the following information:
Below, we’ll incorporate all of the above into a sample debt collection letter you can use for your own purposes.
A debt collection letter should include elements such as the debt owed, the initial due date and, if necessary, warnings of impending legal action.
John Creditor Doe
John Creditor Doe’s address
April 1, 2021
RE: Overdue payment
Dear John Creditor Doe,
[If this is the first or second debt collection letter:] This letter is a reminder [or “another reminder” for a second letter] that a(n) $[amount] balance on your account due on [date] remains unpaid. Please send us your payment [ASAP or within X days of the date at the top of this letter] [insert instructions on how to pay here]. Although we look forward to continuing our business relationship with you, we cannot do so if your balance remains unpaid.
If you have already made this payment, please contact us at [email address or phone number] to rectify this matter. We apologize for any inconvenience this may cause.
[If this is the last collection letter before initiating legal proceedings:] This letter is your final reminder that a(n) $[amount] balance on your account due on [date] remains unpaid. We regret to inform you that if you do not send us your payment immediately by [insert instructions on how to pay here], we will send your balance to collections. A debt in collections can seriously affect your credit score, so we advise you to pay immediately.
If you would like to dispute this debt, you can legally do so with a letter of debt validation submitted within [time frame] of the date listed at the top of this letter. If you do not file a letter of validation within this time frame, it will be assumed that you agree for your debt to be sent to collections.
[Your company name]
After sending a final debt collection letter that warns of legal action, you may want to hire a debt collection agency to recover the debt. Both small businesses and freelancers with nonpaying clients can hire these agencies. Their debt collection experts will handle the collection process on your behalf, allowing you to focus on your usual work.
That said, collection agencies should always be your last resort, as they can be quite expensive. Generally, when you send a debt to collections, the agency will keep a substantial fraction of the debt as its payment, so agencies are often unsuitable for collecting small debts. Additionally, sending a client’s debt to collections is a surefire way to sever ties with that client, so be sure you’re willing to burn that bridge before you take any action.
If you do decide to hire a debt collection agency, consult our collection agency reviews. Our reviews highlight the best collection agencies for small businesses, business-to-business collections, business-to-consumer collections and low-cost services so you can receive your debts with as little hassle as possible.
It can be daunting to confront a client that’s late on their payment, but it’s necessary to establish a paper trail of communications. Whether you send your debt collection letter via email or certified mail, it’s important to track whether the debtor indeed received the communication.
In many cases, this reminder will be enough for them to pay the balance owed or at least set up a payment plan. In other cases, it shows you’ve done your due diligence in trying to collect the debt and work with the party that owes you money. That will be important if you ultimately need to send the debt to collections or file a suit in small claims court. With luck and a well-drafted letter, though, it may not come to that.