Late Payment Recording: Is It Illegal?

Late payments can have serious consequences for both individuals and businesses. For individuals, a late payment can harm their credit score, leading to a higher risk of debt and difficulty in securing loans or credit cards. For businesses, late payments can affect cash flow, causing problems in paying rent, wages, and other essential expenses. In both cases, late payments can result in legal action and penalties. In the case of non-payment of wages, employees can file a wage claim with the Labor Commissioner's Office and seek statutory and civil penalties. For businesses, late payments can be claimed through Small Claims Court, with interest and debt recovery costs permitted by law.

Late payment penalties

Creditors usually don't notify consumer reporting agencies of late payments for 30 days. After this 30-day grace period, late payments will appear on credit reports, and credit scores will likely drop. The longer the payment is delayed, the more severe the consequences will be. For instance, if enough time passes, the creditor may transfer the debt to a collection agency, which can result in harassing phone calls and further damage to the individual's credit score.

In addition to the negative impact on credit scores, late payments can also result in additional fees and penalties. These penalties vary depending on the type of payment and the jurisdiction. For example, in Texas, a 5% penalty is added to the tax amount if the payment is made 1-30 days late, and this increases to a 10% penalty if the payment is made over 30 days late. In California, employees can recover statutory penalties for late payment of wages while still employed, and these penalties can amount to $100 for each failure to pay each employee.

To avoid late payment penalties, it is important to prioritize timely payments and to communicate with creditors in advance if there are any issues with making payments. By taking proactive measures, individuals can maintain their credit health and avoid the negative consequences of late payments.

Payment due dates

Debt Repayment

When an individual borrows funds from a lender, the due date represents the agreed-upon date by which the loan must be repaid in full, along with any accrued interest. Failure to meet this deadline can result in penalties, late fees, and additional interest charges. It is important to note that grace periods offered by some lenders do not eliminate the responsibility of making timely payments.

Tax Obligations

Due dates are also applicable to tax payments. Governments set deadlines for individuals and businesses to file their tax returns and settle any outstanding tax liabilities. Non-compliance with these deadlines can lead to penalties, interest charges, and legal consequences.

Promissory Notes

A promissory note is a legal document outlining the terms and conditions of a loan, including the repayment schedule. The due date specified in the promissory note indicates when the borrower must repay the loan amount. Failure to adhere to this deadline can result in similar consequences as those mentioned above.

Legal Compliance and Financial Planning

Meeting due dates is essential for legal compliance, ensuring alignment with loan agreements and tax regulations. Additionally, understanding due dates aids in financial planning, allowing individuals and businesses to effectively manage their cash flow, allocate funds efficiently, and avoid last-minute financial strain.

In summary, payment due dates are critical in maintaining financial health and complying with legal obligations. Whether it relates to debt repayment, tax responsibilities, or promissory notes, adhering to due dates helps prevent penalties, protects one's reputation, and fosters positive relationships with lenders, suppliers, and stakeholders.

Interest on late payments

Interest Calculation

A simple formula for calculating interest on late payments is:

> Interest = Principal x Interest Rate x Number of Days Late / 360

Late Payment Policies

When charging interest on late payments, it is essential to have a clear and consistent policy in place. This policy should be communicated to clients upfront, preferably in a contract or statement of work agreement. The policy should outline the payment terms, including the expected payment date and any applicable late fees or interest charges.

Strategies for Dealing with Late Payments

In addition to charging interest, there are several strategies that businesses can use to deal with late payments:

• Offer payment plans: This involves allowing the client to pay the invoice in installments over a period of time.
• Provide first-time extensions: For new clients, offering a grace period or a short extension can help build goodwill and maintain a positive working relationship.
• Send payment reminders: Sending upcoming and late payment reminders can prompt clients to pay on time and reduce the likelihood of late payments.

Impact on Credit Scores

Late payments, especially on loans and credit cards, can significantly impact an individual's or business's credit score. It is advisable to act quickly and make payments within 30 days of the original due date to avoid negative consequences. Late payments can remain on credit reports for up to seven years but generally have less influence on credit scores over time, especially if it is an isolated incident.

Credit score impact

Late payments can have a significant impact on your credit score, as payment history is the biggest contributing factor to credit scores in most scoring models. Even a single late payment can harm your credit health. The impact of a late payment depends on several factors, including how long the payment has been past due and your credit history.

Creditors usually don't notify consumer reporting agencies of late payments for 30 days. After that, late payments will appear on your credit report, and your credit score will likely drop. Your credit report will note how many days the payment is past due in 30-day increments, and the longer you take to make the payment, the more severe the consequences.

If you have an excellent credit history, a single late payment is likely to have a more significant impact on your credit score than if you have a less favourable credit history. This is because someone with a lower credit score may already have their negative credit behaviour reflected in their credit score.

Late payments can remain on your credit report for up to seven years, but their influence on your credit score decreases over time, especially if it was a one-time mistake. After seven years, the late payment will be removed from your credit report.

To avoid late payments appearing on your credit report, it is best to act quickly. If you can make the payment within 30 days of the original due date, the late payment will generally not be recorded.

Legal action

Initial Steps

Firstly, contact the customer directly to request payment. This can be done by the business's credit controller or the employee dealing with the customer. It is best to do this in writing, via email or letter, to ensure you have a record of communication.

Interest and Late Fees

If an unpaid invoice cannot be resolved early on, you can charge interest and late fees. Under the Late Payment of Commercial Debts (Interest) Act 1998, you can claim interest at 8% plus the Bank of England base rate, unless your terms and conditions specify another rate.

Background Checks

Before deciding on the next steps, it is prudent to perform background checks on the person or company that owes you money. If the person or company does not have any money or assets, or is on the brink of closure, it may not be worth chasing payment.

Seek Legal Advice

The next step is to obtain legal advice from a solicitor experienced in debt recovery. Most solicitors will offer an initial appointment for a small fee.

Sending a Late Payment Letter

The first step in debt recovery is for your solicitor to write a formal letter requesting payment for the overdue invoice. This letter should also state a reasonable notice period before pending court action and explain that you will issue a claim in court for the money if payment is not made.

Mediation

A solicitor's letter may be enough to resolve the issue, but if not, it will provide both parties with an opportunity to reach an agreement without going to court through business mediation. This can be a formal mediation, with an independent mediator, or an informal mediation, where you meet with the customer to settle the dispute.

Court Claim

If the customer refuses to pay or engage in mediation, you can submit a money claim in court. The specific court depends on the amount owed. For claims of up to £10,000, there is a dedicated small claims court. For amounts over £10,000, this will usually be handled by the 'fast track' or 'multi-track' routes.

Court Fees and Costs

For small claims, a business owner who brings a claim and instructs solicitors to assist will not recover their legal costs, but they can claim their court fees and small expenses. Legal fees are payable by the losing party in the fast and multi-track systems.

Court Outcome

A judge will make a final decision, which is binding on both parties. If the business owner wins, the court will order the customer to make payment within a certain timeframe, usually 28 days from the date of the judgment.

Enforcing the Judgement

There may be some customers who still refuse to pay, even if the court has awarded a judgment against them. In this case, you can instruct bailiffs to remove goods to the value of the judgment obtained from the customer's property. The bailiffs will usually add their costs to the judgment amount.

Employees

In the case of employees not being paid on time, there are also legal options. In California, for example, the Governor signed AB 673 into law in 2019, which amended Labor Code section 210 to allow an employee to recover statutory penalties for the late payment of wages while still employed.

Frequently asked questions