Default of payment

Definition of Terms

“Delayed payment” is a term that describes late payments by debtors. These may be customers who have not paid their invoices within the agreed-upon deadline or even after receiving a reminder. Late payment is governed by the German Civil Code (BGB), where it is defined as “culpable failure to perform despite the ability to do so, the due date, and a reminder.” The term “late payment” is used only in the context of monetary claims. For claims of a general nature, the term “debtor’s default” is used.

What happens if a payment is late?

For a payment to be considered in default, a claim for payment must first exist. This is the case when a service has been properly rendered, a written invoice has been issued, and the debtor has been granted a reasonable payment period. In addition, the debtor must have received a clear, written reminder. Only after receiving this reminder does the debtor fall into default. It is also important to note the 30-day clause, which states that debtors are in default after 30 days unless another date has been agreed upon.

Creditors suffer a financial loss due to late payment because they must secure financing from other sources during the period until they receive the amount owed. They may even have to take out a loan and pay interest on it. To make debtors share in these costs, creditors can claim interest and other expenses in the event of late payment. They can also send debtors a second reminder with a specific deadline before taking further action.

As soon as a payment is in default, creditors have a legal claim against debtors for the payment of late-payment interest. For consumers, the German Civil Code (BGB) limits the amount of late-payment interest to five percent above the base rate. For businesses, the maximum is nine percentage points. The amount of late-payment interest is agreed upon individually in transactions between businesses.