Issuing a letter of demand is the first step in initiating legal action when a customer hasn’t paid, and can sometimes motivate them to open their wallets.
Litigation is only one of several legal avenues available to you when it comes to chasing payment. Before embarking on that path, it’s best to try alternative dispute resolution methods like mediation and arbitration.
Sometimes just the threat of legal action – if your client knows you’re serious enough to go all the way – is enough to incentivise prompt payment.
Issuing a letter of demand
If your polite calls and reminders have gone nowhere, issue a letter of demand, which is a written statement outlining:
- The relationship you have with the debtor (for example, that you provided them with goods or services),
- The amount due to you, and
- A description of further action you plan to take if the amount is not paid by a certain date.
If possible, add further details of the transaction such as dates or copies of the order or commission, the invoice, and the reminders.
Keep a copy of the letter for your records and ensure the debtor receives it, for example via personal delivery or via registered post.
The key here is to keep records. You need to have everything in black and white, and you need to demonstrate to the other party that you have everything in black and white so that they know that you are serious about the issue, and well-equipped to follow through on your threat of legal action.
Want more articles like this? Check out the financial management section.
Threaten to take things a step further
A letter of demand is basically a warning of legal proceedings that may take place if the debt is not paid; it also gives the recipient an additional opportunity to pay. Its intent should be to allow the debtor one more chance to pay the debt to avoid legal proceedings, while also providing you with a paper trail should litigation eventuate.
Through issuing a letter of demand you can also make substantiated warnings of other types of proceedings, such as registering the unpaid debt with a credit-reporting bureau. Use wording such as: “Unless this invoice is paid in full within seven days, we will have no alternative but to register your company on CreditorWatch, Australia’s online bad debt registry. It is common practice for banks, utilities and other businesses to monitor this debt registry. A default against your business could lead to frozen accounts and difficulties in obtaining credit in the future.”
This ensures the warning is both legal and non-threatening.
You don’t need a lawyer or legal expert to draft a letter of demand so long as it has all the elements outlined above, which makes it admissible as evidence of the relationship and transaction history should it be required. If you are not confident of your ability to issue a letter of demand, however, it may be worthwhile to hire a legal professional; it’s amazing what a letter of demand printed on legal letterhead can do to suddenly free up a debtor’s money.
This is the second in a series of three articles about resolving disputes with debtors. The first article outlines the processes of mediation and arbitration, and the next in the series will discuss litigation.
Have you ever needed to issue a letter of demand to a non-paying customer? What was the outcome? Any tips for first timers?