You rightly expect your customers to pay their invoices on time. But, understanding human nature, you prepare for late payments by letting them know you will charge a late fee if they don’t pay on time. You may ultimately end up bringing them to court. To make sure your righteous quest to get paid doesn’t end up getting YOU in hot water, here are three things you can do:
1. Be sure your contract with the customer provides for payment of a late fee. If you have not contracted for it, you may not be able to assess it. The customer has to know that paying late will result in extra fees.
2. Check your state law for limits on the late fee that may be assessed.
3. Be careful not to inadvertently bring the transaction under the requirements of your state’s consumer credit laws. This can happen primarily in three ways: 1) by assessing “interest” (as opposed to a late charge); 2) by setting up a payment plan; and 3) by continuing to allow the customer to incur charges on their account with you after they are in default.
It’s not possible to analyze these issues under all 50 states’ laws here, but to help illustrate how a business can inadvertently run afoul of state laws in imposing late fees, let’s look at the issues under the laws of one state – Wisconsin. I choose Wisconsin because it is my state and, therefore, both the best state and the state I know best.
Avoiding trouble when charging late fees in Wisconsin.
There are three primary issues to be mindful of in Wisconsin: 1) that you not inadvertently grant credit to consumers; 2) that there is a contractual basis for assessing the late fee; and 3) that the fee is within the limit allowed by statute.
I’m Not Granting Credit; I Just Want to Get Paid.
A business can get into hot water if it attempts to assess “interest” in connection with delinquent consumer accounts in Wisconsin because “interest” is a term used in credit transactions, not in transactions where what is owed is expected to be paid immediately. Under the Wisconsin Consumer Act (“WCA”), a transaction may be considered a “consumer credit transaction” if a “finance charge is or may be imposed.” (Wis. Stats. § 421.301 (10).) The definition of “finance charge” includes “interest,” but does not include a late payment charge. Thus, use of the term “interest” could lend credence to an argument that the transaction at issue is a consumer credit transaction subject to the WCA (which, trust me, is a law you’d rather not subject yourself to if you can help it).
Thus, as a preliminary matter, it is probably safer to call it a “late fee,” “late payment charge” or “delinquency fee,” rather than “interest.”
Avoid Payment Plans
To further bolster the argument that you are not extending credit, you’ll also want to make clear to the customer that the entire amount is due and expected to be paid by a date certain in the very near future (net 15 or net 30 is fine). It is best not to enter into a payment plan with consumers (at least not one that allows them to pay in more than four installments), and not to allow them to continue to add additional charges to their account until what they already owe is paid.
If you allow consumers to pay what they owe you in installments, and especially if you also add “interest,” you risk being subject to the WCA, including its steep consequences for non-compliance.
Be Sure the Consumer is Aware of the Penalty for Late Payment
If you want to obtain a charge for late payment, the customer should be given a notice or sign an agreement at the time a contractual relationship is established that payment is due by a specific date and that there is a penalty or late payment charge if payment is not received by that date. Make clear that the customer does not have the right to defer payment after the due date, but agrees to pay a charge for late payment if they do miss the deadline.
Keep it at 1% per month or less.
Unless there is another statute that expressly allows a higher rate for a particular type of transaction, the maximum rate of late fees in Wisconsin is 1% per month, or 12% per year. (Wis. Stats. §138.05.) A typical agreement concerning a late payment charge would be a statement on the sales slip or service agreement stating: “Payment is due within 30 days of sale. A 1% per month (12% per year) late payment fee will be assessed on any unpaid balance remaining after 30 days.”
Covering my bases: There is no legal advice contained in this post. Legal advice entails applying the law to specific facts. I don’t know what your facts are and any resemblance to them here is purely coincidental. Instead, this post is meant to provide general information, which may or may not be complete and accurate. If you need legal guidance, please feel free to contact me using the contact information on my web site – www.westbendlaw.com.