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Failed Payment Collection

Dunning is payment retry logic. Collections is what happens when dunning fails. Most subscription businesses know how to retry payments. Fewer know when to stop, what rules apply, and when debt becomes uncollectible.

This page covers the line between normal dunning and actual debt collection.

On this page

Why This Matters for Subscription SMBs​

The scenario:

  1. Customer signs up for your $50/month SaaS subscription
  2. Month 3: Their card declines (insufficient funds)
  3. You retry 3 times over 2 weeks (normal dunning)
  4. All retries fail
  5. Customer stops responding to emails
  6. You suspend their account

Now what?

  • Do you keep trying to collect the $50?
  • Can you call them repeatedly?
  • Can you email them every day?
  • When do you give up and write it off?
  • What if you accidentally violate debt collection laws?

This page answers those questions.

What "Debt Collection" Actually Means Here​

For subscription SMBs, "debt collection" is:

NOT: Hiring aggressive collectors to chase people down NOT: Reporting to credit bureaus NOT: Suing customers for small amounts

YES: Understanding when your normal payment retry crosses into legal "debt collection" territory YES: Knowing when the cost to recover $50 exceeds the $50 itself YES: Protecting yourself from accidentally harassing customers

The practical question: "Our dunning failed. Do we keep trying or write it off?"

TL;DR for Busy SMBs​

The answer for most subscription businesses:

Debts under $100: Write off at 60-90 days. Not worth pursuing. Debts $100-$500: Maybe internal collections for 30 more days, then write off. Debts over $500: Consider external collections agency, but only if customer has ability to pay.

Don't: Call customers repeatedly, threaten legal action, or report to credit bureaus for subscription debts. Do: Send 2-3 friendly reminders, then write it off and move on.

The cost to collect $50 exceeds $50. Your time and brand reputation are worth more.

Dunning vs Collections vs Charge-Off​

StageWhat It IsTimelineWho Handles
DunningAutomatic payment retries + remindersDays 0-30Your system
Collections (internal)Persistent contact to collect debtDays 30-90Your team
Collections (external)Third-party agency attempts collectionDays 90-180Collections agency
Charge-offWrite off as uncollectibleDay 120-180Accounting

This page focuses on stages 2-4 (actual collections). For dunning (stage 1), see Subscriptions & Recurring.

When Does Dunning Become Collections?​

This is the important distinction. Most subscription SMBs never do actual "debt collection" - they just retry payments and give up. But you need to know where the line is.

Dunning (This is Normal, Keep Doing It)​

Acceptable dunning practices:

  • Automated payment retries (3-7 attempts over 2-4 weeks)
  • Email reminders: "Your payment failed, please update your card"
  • In-app prompts: "Update payment method to restore service"
  • Service suspension until payment (you stop providing service)
  • Friendly reminders: "Hi, your card declined. Want to update it?"

This is NOT debt collection. This is normal business operations. No special rules apply beyond basic decency.

Collections (This is Where Rules Kick In)​

You've crossed into "collections" when you:

Real-world examples:

Dunning (OK)Collections (Different Rules)
"Your payment failed. Click here to update your card.""You owe us $50. Pay immediately or we'll take legal action."
Retry payment 3 times over 2 weeksCall customer daily for 2 weeks demanding payment
Suspend service until card is updatedThreaten to report to credit bureaus if not paid
Send 3 automated emailsCall customer's workplace asking about payment
"Update your card in your account settings""We've hired a collections agency to pursue you"

The practical line:

  • Up to 5 friendly contacts over 4 weeks = Normal dunning
  • More than 5 contacts, demanding language, threats = Collections territory

For most SMBs: You never cross this line. You just write it off after 3-5 dunning attempts.

Fair Debt Collection Practices Act (FDCPA)​

Does FDCPA Apply to Merchants?​

Maybe.

FDCPA applies to:

  • Third-party debt collectors (collections agencies)
  • Companies whose principal business is collecting debts

FDCPA does NOT apply to:

  • Creditors collecting their own debts (most subscription businesses)
  • BUT: Many states have similar laws that DO apply to all collectors

Practical reality: Even if FDCPA doesn't legally apply to you, following FDCPA guidelines protects you from state-level violations.

FDCPA Key Rules​

Prohibited PracticeWhat It Means
HarassmentRepeated calls, profane language, threats
False statementsLying about amount, legal action, credit reporting
Unfair practicesCollecting unauthorized amounts, depositing post-dated checks early
Third-party contactTelling others about the debt
Inconvenient timesCalling before 8 AM or after 9 PM
Workplace contactIf you know employer prohibits it

Penalties: $1,000 per violation + legal fees + damages

When to Stop Collecting​

The 90-Day Rule (Industry Standard)​

Most subscription businesses stop active collection at 90 days past due:

Days 0-30: Dunning (automated retries, update card emails) Days 30-60: Gentle reminders (1-2 emails, maybe 1 call) Days 60-90: Final notices (last chance to pay) Day 90+: Write it off and move on

Why 90 days?:

  • Recovery rates drop dramatically after 90 days (5-10% recovery)
  • Cost of collection exceeds expected recovery ($30-50 to collect $50)
  • Legal risk increases with persistent contact
  • Brand damage from aggressive collections > $50 recovered
  • Better to write off and move on

The real advice: For subscription SMBs, write off small debts quickly (60-90 days). Don't waste time or damage your brand chasing $30-$100.

What This Page Tells You NOT to Do​

Common SMB mistakes:

  1. Calling customers 10+ times about a $50 failed payment

    • Reality: This violates harassment rules and destroys your brand
    • Do instead: 2-3 friendly emails, then write off

  2. Threatening legal action for small subscription debts

    • Reality: False threats violate FDCPA-like state laws
    • Do instead: Suspend service, send final notice, write off

  3. Hiring collections agency for debts under $100

    • Reality: Agency takes 50%, you net $25-50, customer hates you forever
    • Do instead: Write it off, it's not worth it

  4. Pursuing failed payments for 6+ months

    • Reality: Cost to collect > recovery after 90 days
    • Do instead: Set 90-day write-off policy and stick to it

The guidance is: Stop trying to collect. Write it off. Move on.

Cost-Benefit Analysis​

Calculate whether to continue collecting:

Debt AgeRecovery RateCost to CollectNet Recovery
0-30 days60-80%$2-5 per accountHigh
30-60 days30-50%$5-15 per accountModerate
60-90 days15-25%$15-30 per accountLow
90-180 days5-10%$30-50 per accountNegative often
Over 180 daysUnder 5%$50-100+Strongly negative

Stop collecting when: Cost to collect > expected recovery

For most subscription businesses:

  • Under $50 debt: Stop at 30 days
  • $50-$200 debt: Stop at 60-90 days
  • Over $200 debt: Consider external collections at 90 days

Collections Agencies: When and How​

When to Use Collections Agency​

Consider external collections if:

  • Debt is over $100-200 (agencies won't take smaller)
  • Customer has assets/ability to pay
  • You've exhausted internal collection attempts
  • Debt is under 90-180 days old (fresher = better)

Skip external collections if:

  • Debt is under $100 (not worth it)
  • Customer is judgment-proof (no assets)
  • Debt is over 1 year old (too stale)
  • Your brand reputation matters more than recovery

How Collections Agencies Work​

Contingency basis (most common):

  • Agency keeps 25-50% of recovered amount
  • You get 50-75%
  • No upfront cost
  • Agency only makes money if they collect

Flat-fee or account purchase:

  • Agency buys debt for 5-20 cents per dollar
  • You get cash upfront (but pennies on dollar)
  • Agency owns the debt and keeps all recovery

Collections Agency Recovery Rates​

Debt AgeExpected RecoveryYour Net (50% contingency)
60-90 days15-25%7-12% of original debt
90-180 days10-15%5-7% of original debt
Over 180 days5-10%2-5% of original debt

$1,000 debt at 90 days:

  • Agency recovers: $150 (15%)
  • Agency keeps: $75 (50%)
  • You get: $75 (7.5% of original debt)

Is $75 worth damaging customer relationship and your brand? Depends on your business.

Charge-Off Decisions​

What is a Charge-Off?​

Charge-off = Recognizing debt as uncollectible and removing from accounts receivable

This is an accounting decision, not a legal one:

  • Debt still legally exists
  • Customer still owes it
  • You can still collect
  • But you're not counting it as expected revenue

When to Charge Off​

IRS Guidelines (for tax deduction):

  • Must be "worthless" (uncollectible)
  • Reasonable efforts to collect
  • Typically 120-180 days past due

Industry practice for subscriptions:

  • B2C: Charge off at 90-120 days
  • B2B: Charge off at 120-180 days
  • Enterprise: May pursue longer

Charge-Off Process​

  1. Stop including in accounts receivable
  2. Mark as bad debt expense
  3. Decide: Write off entirely or send to collections
  4. Document why debt is uncollectible
  5. Notify accounting for tax purposes
Tax Implications

Charged-off debt may be tax-deductible as bad debt expense. Consult your accountant. This is tax advice territory, not payment advice.

When to Write Off Entirely​

Write off without further collection if:

ScenarioAction
Debt under $50Cost to collect exceeds value
Customer complained about product/serviceCollections will create negative reviews
Payment method fraudCustomer claims unauthorized, likely to win
Customer is unreachableNo valid contact info, no response
Brand risk too highCollections damage outweighs recovery

For most subscription SaaS: Write off anything under $100 at 90 days. The brand damage from aggressive collections outweighs $50-100 recovery.

Best Practices for Subscription Businesses​

Tier Your Collection Effort by Debt Size​

Debt AmountCollection Strategy
Under $2530 days dunning, then write off
$25-$10060 days dunning, then write off
$100-$50090 days internal collections, then decide
Over $50090 days internal, consider external collections

Separate Involuntary from Voluntary Churn​

Involuntary churn (payment failed):

  • Customer wanted to stay, card declined
  • Worth significant effort to recover
  • Update card tools, retries, customer service

Voluntary churn (customer cancelled):

  • Customer chose to leave
  • Don't pursue aggressively
  • May attempt win-back campaign later

Don't waste collections effort on voluntary churn.

Document Everything​

For any collections activity:

  • Log all contact attempts (date, time, method, outcome)
  • Save all communications (emails, call recordings)
  • Document customer promises ("I'll pay next week")
  • Record disputes or complaints

If you send to collections agency, you need this documentation.

Test to Run​

Failed payment collections audit:

Week 1: Identify aged debt

  1. Pull all failed payments over 30 days past due
  2. Bucket by age:
    • 30-60 days: $_____
    • 60-90 days: $_____
    • Over 90 days: $_____

Week 2: Calculate recovery rates 3. For each bucket, calculate:

  • Total debt in bucket
  • Amount recovered (if you've been collecting)
  • Recovery rate: recovered / total

Week 3: Set charge-off policy 4. Define your charge-off thresholds:

  • Under $25: Charge off at ___ days
  • $25-$100: Charge off at ___ days
  • Over $100: Charge off at ___ days
  1. Implement policy
  2. Track recovery rates by bucket

Success criteria: Clear charge-off policy, recovery rates improve or costs decrease.

Scale Callouts​

Under $100K/month MRR:

  • Write off aggressively (under $100 at 60 days)
  • Internal collections only
  • Don't use external agencies
  • Brand matters more than recovery

$100K-$500K/month MRR:

  • Tier collection effort by debt size
  • Consider external collections for $200+ debts
  • Still write off under $100 quickly

$500K-$1M/month MRR:

  • Dedicated collections process
  • External agency relationship for $150+ debts
  • Track recovery rates by bucket

Over $1M/month MRR:

  • Collections team or dedicated resource
  • Automated collections workflows
  • External agency for $100+ debts
  • But still write off quickly for brand protection

Where This Breaks​

  1. Aggressive collections destroy brand: One angry customer posting about collections harassment can cost you 10-100 future customers. Calculate reputation risk.

  2. FDCPA violations are expensive: $1,000 per violation. One aggressive collector making 50 calls = $50K+ exposure.

  3. Payment disputes override collections: If customer disputes the charge with their bank, stop collections immediately. Let chargeback process handle it.

  4. International customers have different rules: EU has stricter consumer protection. GDPR limits contact. Research local laws.

  5. Subscription services have leverage: Cancel service = customer can't use product. This is better leverage than aggressive collections.

Next Steps​

Need to collect failed payments?

  1. Implement proper dunning sequence first
  2. Set charge-off thresholds by debt size
  3. Document all collection activity

Considering collections agency?

  1. Only for debts over $100-200
  2. Research agency reputation
  3. Verify they follow FDCPA
  4. Calculate if 7-12% net recovery is worth brand risk

Want to reduce failed payments instead?

  1. Implement Card Account Updater
  2. Use network tokens for higher auth rates
  3. Optimize dunning sequence

See Also​