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Is It Legal to Transfer Debt Collection Fees to the Debtor?

Is It Legal to Transfer Debt Collection Fees to the Debtor

Late payments from customers can be a frustrating reality for any business owner. Not only does it disrupt your cash flow and impact profitability, but it also throws in extra work and expense with trying to recoup the debt. So, what options do you have? Can you pass the cost of collecting that debt onto the debtor themselves? The answer is yes, but under specific conditions and with the right clauses in your contracts.

It's important to remember that you can't arbitrarily add fees to your debtor's bill. Consumer protection laws exist to prevent unfair practices. However, you can negotiate and include clauses in your contracts that allow you to recover certain costs incurred due to late payments.

Adding debt collection costs to the contract.

The key lies in having a well-drafted contract with clear and enforceable clauses. A collection costs clause can be added to your contract agreement, allowing you to impose legal and debt collection costs if you hire a collection agency.

Here's an example: In addition to Interest and any other late fees, if [Your Company's Name] engages the services of a debt collection agency for the recovery of any unpaid balances, [Your Customer's Name] shall be liable for all fees and commissions charged by the agency, which shall be in addition to the total outstanding amount owed by the Customer.

State laws may impose limits: Even with contractual clauses, state laws might cap the amount of late fees, interest, or collection costs you can charge. Ensure your contract terms comply with state regulations.

Practical Tips:

  • Consult an attorney: When drafting your contracts, involve your lawyer to ensure the clauses are legally sound and enforceable.

  • Be reasonable: Avoid exorbitant fees that exploit your customers. Aim for fair and justifiable charges that cover your incurred costs.

  • Communicate proactively: Don't wait for payments to become delinquent. Reach out to customers on time, remind them of due dates, and discuss potential consequences of late payments.

You should consult an attorney to ensure your contract wording complies with all applicable laws and regulations.


Disclaimer: Any and all information is not intended to be, nor is it, legal advice. Please consult your attorney for information concerning allowable rates of interest.

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