Fixed recovery compensation

What it means

The flat-rate recovery cost compensation is a fixed sum that a creditor in business dealings may claim from a debtor who pays late. The Commercial Code grants it for each unpaid claim at a statutory amount, without the creditor having to prove actual costs.

The entitlement arises automatically on the day payment becomes overdue and applies in addition to late-payment interest. It is not a penalty but compensation for the time and administration of chasing payment. It applies only between businesses and in dealings with public authorities, not to consumers.

If actual recovery costs are higher, for example when a collection agency or lawyer is engaged, the creditor may claim reasonable compensation for the difference on top of the flat amount. The compensation cannot validly be excluded by contract where that would be grossly unfair to the creditor.

How it works in practice

We advise clients to claim the flat-rate compensation systematically, not only from problem customers. We mention it in the first reminder or letter before action, which in itself often prompts faster payment.

Where a customer has several unpaid invoices, the entitlement arises for each one, so the amount adds up quickly. With commercially important customers we weigh up with the client whether to claim it or use it as leverage in agreeing future payment terms.

In the creditor’s books we generally recognise the compensation as income only once the debtor acknowledges or pays it, in line with prudence. For the debtor it is an expense and, like late-payment interest, becomes tax-deductible only once paid.

What to watch out for

The entitlement is subject to limitation just like the claim itself. If the flat-rate compensation is forgotten during debt recovery and the debt is paid without it, recovering it later is usually awkward and sours the relationship with the customer.

The flat-rate compensation must not be confused with a contractual penalty, which has to be expressly agreed in the contract. The two can be combined, but a court may reduce an excessive penalty, whereas the flat amount is set by law.