If you have a written contract, you probably want a collections clause. A collections clause is that section in your contract that outlines your rights and responsibilities when a client doesn’t pay. It’s an incredibly useful clause, especially in North Carolina.
In North Carolina, you can’t recoup the cost of chasing down payment without the contract saying otherwise. For example, if you have a $200 contract but the customer doesn’t pay, you can only recover $200. If you have a collections clause, you can also collect the court costs, cost of collecting, interest, fees, and reasonable attorney fees. It still doesn’t put you in a better position than if they paid, but it mitigates the harm to you.
Step 1: Define the Breach
You need to know when a collections clause comes into play. Therefore, you need to outline how long or what type of breach triggers this clause. For example, your clause can trigger after the invoice is 30 days’ past due. What about other reasons? Maybe you need to specify they’re in breach if they notify you that they won’t pay their debt, or if you have reason to believe they can’t. There are lots of different ways you can define this breach, and it largely depends on your circumstances.
Keep in mind the more words you include in this section, the less likely a customer will sign it. It is always a balance. I could easily make this section take up 3-4 pages, but every customer would scoff at the sight of that. Additionally, they’d probably think you were the problem if enough people weren’t paying you had to create such an elaborate collections clause.
Step 2: Outline the Costs
The next step is list what costs the customer will be liable for if this breach occurs. The most common ones are court costs, collection costs, attorney fees, and interest. Some people add an administrative fee as well. The more specific these costs are, the more likely that they’ll be upheld in a lawsuit. For example, there were actually several cases that refused to grant attorney’s fees because they didn’t specify that the attorney fees had to be reasonable. Under NC law, reasonable for contract collections has to be 15% of the outstanding balance or less. Might as well put that in there just to be safe.
Additionally, you can’t just say “administrative fee.” You have to specify what that fee is. It’s even better if you can specify how that administrative fee is reasonably related to the additional cost you’ll face by their nonpayment (beyond other fees you’ve put in the clause). For example, an administrative fee of $50 can be reasonable, especially if you outline that it is so that you can pay your accountant to update the invoice and send out a statement. That make sense. An administrative fee that is excessive and unrelated to additional costs will not be upheld.
Interest also has to be reasonable. For consumer contracts, the interest rate is capped at 16% effective rate annually. Anything above is not valid and you’ll lose all the interest (and potentially lose a countersuit). However, you can’t just say 16% because if you’re compounding monthly, weekly, daily, or continuously, the effective rate would end up higher than 16%. I have yet to see a case where that argument is made, but you never want to be the first case. I tend to advise my clients to set the interest between 8-12%. That’s sufficient to cover lost profits on that unpaid invoice.
Sample Collections Clause
In the event Client fails to pay the invoice within 30 days of receiving it, Client shall owe and be responsible for the court costs, collection costs (including reasonable attorney fees not to exceed 15% of the outstanding balance), and accumulated interest at 12% per annum, compounded monthly beginning on the first day of the very next month following the 30 days from the invoice date.
Simplest Sample Collections Clause
This is not my best work, but it gets you started. Make it your own!
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