Running the Business · Part 3
Collections: demand letter, lien, small claims, attorney. When each is worth it, and the one thing that makes all of them impossible
An unpaid invoice has four escalations, each with a cost and a deadline: a written demand, a mechanics lien, a small claims case, and a lawyer. The right one depends on the amount, the entity you chose in Phase 1, whether the lien window is still open, and whether the customer is a homeowner or a general contractor. This lesson gives the decision for each stage, the letter that resolves most disputes before the lien, the small claims process a sole owner can run alone for up to $12,500, and the rule that overrides all of it: a contractor who was not properly licensed at every moment of the job cannot collect at all, and the customer can sue to get back what they already paid.
What the full lesson covers
- B&P 7031: you cannot sue to collect for work done while your license was suspended, expired, or inactive, even for a day, and the customer can recover everything they paid. A bond lapse or a workers' compensation lapse mid-job (lessons 0.2 and 0.3) is a collections problem before it is anything else.
- Stage one, the demand letter: facts, amount, deadline, and what happens next, sent certified. It resolves most disputes because it is the first thing the customer's lawyer or insurer reads.
- Stage two, the lien: only if the recording window is open (lesson 3.7), the amount justifies a foreclosure suit, and you will actually sue within 90 days. Calendar the window from the last day of work, not from the demand letter.
- Stage three, small claims: up to $12,500 for a sole owner, $6,250 for a corporation or LLC, no lawyers, a few months to a hearing, and a judgment you then have to collect. Best for residential invoices under the limit where the customer has a job and a bank account.
- Stage four, an attorney: when the amount is large, the lien is in play, the debtor is a GC or an entity, or the contract has an attorney's fee clause (reciprocal under Civil Code 1717). Interest runs at 10 percent from the breach (Civil Code 3289); four years to sue on a written contract (CCP 337).
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More lessons in Contracts and Getting Paid
- 1The home improvement contract (B&P 7159): every required element, the exact notices, and the three-day right to cancel
- 2The deposit cap: $1,000 or 10 percent, whichever is less, and progress payments that cannot exceed the work. CSLB's most common citation
- 3Service and repair contracts (B&P 7159.10): when the short form applies, what it must say, and how a service call falls out of it
- 4Subcontracts with GCs: the twelve clauses to read, what to strike, and what to negotiate
- 5Change orders: written, signed, before the work. Every time. Why verbal ones end in CSLB complaints
- 6Mechanics liens I: the 20-day preliminary notice. Miss it, lose your rights
- 7Mechanics liens II: recording deadlines, the 90-day foreclosure clock, the four statutory release forms, stop payment notices, and payment bonds on public work
- 8Collections: demand letter, lien, small claims, attorney. When each is worth it, and the one thing that makes all of them impossibleYou are here
- 9Taking payment: cards, ACH, checks, cash, financing partners, and getting every dollar into the right account
- 10Case: the job that went unpaid. Where the contractor lost lien rights and how to have kept them
- 11Case: the deposit that became a citation
- 12Case: the change order that was never written
- 13Template: the home improvement contract, with every B&P 7159 notice verbatim
- 14Template: the service and repair contract (B&P 7159.10), one page, with the notices verbatim
- 15Template: the change order, one page, signed before the work
- 16Template: the 20-day preliminary notice, with the proof-of-notice declaration
- 17Template: the four statutory lien waiver and release forms (Civil Code 8132 to 8138), verbatim
- 18Template: the demand letter, homeowner version and general contractor version
- 19Template: the subcontract review checklist. Twelve clauses, three boxes each