Default of payment

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Table of contents:
  1. What is
  2. Who can be in default of payment?
  3. When does default of payment occur?
  4. How is default of payment determined?
  5. Where is default of payment legally regulated?
  6. What are the consequences of default of payment?
  7. How high are the default interest rates?

What is default of payment?

A debtor is in default of payment when they fail to pay a due financial obligation on time. This means that payment is not made despite an existing obligation. Default of paymentt does not automatically occur when an invoice becomes due; certain conditions must be met.

In general, default of payment can occur when the creditor sends a reminder. In some cases, it happens automatically—for example, when an invoice remains unpaid long after its due date (§ 286 (3) BGB).

Once in default of payment, the debtor must not only settle the outstanding claim but also pay default interest and other related costs.

Who can be in default of payment?

In principle, any debtor who fails to make a due payment on time can be in default of payment. This applies to both businesses and private individuals.

  • Businesses (B2B): Business customers must pay invoices within the agreed payment period. If they fail to do so, they may fall into default of payment.

  • Consumers (B2C): Private individuals are also required to make payments on time.

  • Authorities and public institutions must comply with statutory payment deadlines. They can also be in default of payment if they fail to meet these deadlines.

When does default of payment occur?

Default of payment begins when a due financial obligation is not paid on time. There are two main ways in which default of payment can occur:

1. Through a reminder

The creditor formally requests payment from the debtor, either in writing or verbally. If the debtor fails to pay, default of payment begins upon receipt of the reminder (§ 286 (1) BGB). However, a reminder is only necessary if no automatic default of payment rule applies.

2. Automatically after 30 days

  • For businesses (B2B): Default of payment occurs automatically if an invoice remains unpaid 30 days after its due date and receipt. A reminder is not required (§ 286 (3) BGB).

  • For consumers (B2C): The 30-day rule applies only if the invoice explicitly states this. If no such notice is provided, the creditor must first send a reminder before default of payment occurs.

Additionally, there are exceptional cases where default of payment occurs without a reminder or the 30-day rule, such as when a contractually agreed payment deadline is missed or when the law mandates immediate payment.

How is default of payment determined?

Whether a debtor is in default of payment can be determined based on the payment deadline and any reminders issued. The key factors include:

  • Due date of the claim: Default of payment can only occur if the payment is actually due. This means that the payment deadline must have passed.

  • Proof of a reminder or automatic default of payment: If a reminder has been sent and payment remains outstanding, default of payment begins upon receipt of the reminder. In some cases, default of payment occurs automatically, for example, after a contractually agreed period has elapsed.

  • Review of legal provisions: If a reminder is not required—such as in the case of the 30-day rule or a contractual agreement—default of payment is determined solely by the expiration of the payment period.

Creditors can prove default of payment by documenting the payment deadline, issued reminders, or contractual conditions.

Where is default of payment legally regulated?

The legal basis for default of payment is outlined in the German Civil Code (BGB). The most relevant sections include:

  • § 286 BGB – Default of payment of the debtor
    → Defines when a debtor is in default of payment, whether a reminder is required, and any applicable exceptions. It also includes the 30-day rule.

  • § 288 BGB – Default interest and additional costs
    → Specifies the interest rates a creditor may charge in case of default of payment. It also governs any additional costs arising from the delay.

In addition to the BGB, contractual agreements can play a role. Businesses, for instance, may specify individual payment deadlines or default of payment clauses in their contracts. However, such agreements must comply with legal requirements.

There are also special regulations for specific sectors, such as public authorities or consumers. Additionally, international contracts and commercial law may influence default of payment in cross-border business transactions.

What are the consequences of default of payment?

Once a debtor is in default of payment, this can have legal and financial consequences. The creditor has several options to enforce payment and recover any damages incurred.

1. Additional costs for the debtor

The debtor must cover all extra costs resulting from default of payment, including:

  • Reminder fees: The creditor can charge for sending reminders.

  • Debt collection fees: If the creditor hires a collection agency, the debtor must bear the associated costs.

  • Legal fees: If an attorney is engaged, the debtor may be responsible for the legal costs.

  • Default interest: The debtor must pay interest on the overdue amount. The exact rate is set by law and varies depending on different factors (§ 288 BGB).

2. Negative impact on creditworthiness

A default of payment can affect the credit rating of the debtor. Creditors may report overdue payments to credit agencies such as SCHUFA, provided legal requirements are met. Reporting generally requires a prior reminder and a reasonable waiting period (§ 31 (2) BDSG).

As a result, obtaining loans, leasing agreements, or installment payments may become more difficult. Business partners may also view a deteriorating credit rating as a financial risk.

If the debtor fails to pay despite reminders, the creditor can take legal steps:

  • Judicial dunning process: The court issues a dunning notice, which can be used for enforcement.

  • Enforcement proceedings: If payment is still not made, a bailiff can seize assets.

  • Litigation: The creditor may file a lawsuit for payment, which involves additional costs.

To avoid further costs and legal action, debtors should respond to reminders as soon as possible.

How high are the default interest rates?

The default interest rates are specified in § 288 BGB and depend on whether the transaction involves a private individual or a business.

1. Default interest for consumers (B2C)

If a private customer fails to pay an invoice on time, the default interest rate is:

  • 5 percentage points above the base interest rate

2. Default interest for businesses (B2B)

If a business fails to make a due payment, a higher interest rate applies:

  • 9 percentage points above the base interest rate

  • Additionally, a €40 flat-rate compensation for default of payment may be claimed (§ 288 (5) BGB).

3. Base interest rate as a calculation basis

The base interest rate is set by the Deutsche Bundesbank and can change every six months (on January 1 and July 1). The current base interest rate can be found on the Bundesbank’s website.

4. Example calculation of default interest

If the base interest rate is, for example, 1.62%, the following default interest rates apply:

  • Consumers: 6.62% default interest (1.62% + 5%)

  • Businesses: 10.62% default interest (1.62% + 9%)

The default interest rate increases with the base interest rate and may vary depending on the economic situation.