When to take legal action against client for outstanding payment?

Question

I have an hourly-rated contract with a client (small tech company, ~5 people + a few contractors). The first 7 months went well - payments tended to be a week or two late on occasion, which I attributed to disorganization. However, a month ago the accounts receivable reached $25k - at which point I stopped working for the client. Since then, I have a chain of emails and phone calls trying to solicit payment (or partial payment) from the client. I receive responses within 1-3 days - usually a verbal guarantee from the client that I'll receive at least a partial payment within the next week - which has never happened.

I'm now considering taking legal action (a letter from lawyer then sueing). The law firm is willing waive all costs if we do not receive payment, though they will of course take a decent percentage of the payout if we win. This, of course, is all assuming that the client is able to pay (an important variable in this equation).

I'm hoping there is a good rule of thumb out there to determine when its best to begin legal action. My concerns are (1) loss of money and (2) the client becoming uncivil/hostile. Thx.

p.s. - please note this is similar to question 6581 though this addresses a larger outstanding payment ($25,000 vs £100) and, thus, addresses costs of legal action.

Answer 1

"When"? I'd have started considering it if a client of mine was more than two weeks late. But you're way past that point. The real question is how effective anything you do will actually be.

If you're going to get the strongly-worded letter from the attorney sent to your client, you need to be in a position to back up the demand. You've really hurt yourself because if things go to litigation, you may to have to pull more money out of your pocket to pay the attorneys before all is resolved. Then, you might get a judgment in court, but that doesn't mean your client will pay immediately; the client might even dissolve the business and start anew just to get around paying.

The point is that you must be very careful about being too headstrong in your remediation efforts, because legal fees can eat up anything you might gain. Consider your options - and emotional tolerance level - carefully.

And NEXT time, don't let a client run that kind of a bill up without taking action much sooner.

Answer 2

The client is ready for a lawsuit whenever you decide you will proceed this way. you can sue anyone, any time.

When you are firm about going the lawsuit way and you see that no other method will work, then visit a legal adviser and check how realistic is that you will win. Because if you are likely to lose, it better to lose 25k then 25k+legal costs.

But if I were you, before going to the lawsuit way, I would ask my legal representative to send him official "last warning before a lawsuit" which basically say that the lawsuit will be filed within X days and that you will stop all relations with the clients including turning off his server, webpage, mobile app or whatever you were working for him.