What to Do When a General Contractor Files for Bankruptcy
The Cromeens Law Firm
November 3, 2026
Last Updated: October 8, 2026
Quick answer: A backcharge is money a general contractor deducts from your payment for work they claim was defective, late, or incomplete. Texas law treats it as a withholding under the Prompt Payment Act (Texas Property Code Chapter 28), so it is capped at the disputed amount, requires written notice with specific reasons, and must give you a chance to fix the problem first. Skip those steps and the backcharge is likely unlawful, which can cost the contractor 18% annual interest plus your attorney fees.
If you run a construction business in Texas, a backcharge can erase your profit on a job with one line on an invoice. The general contractor deducts money from your payment, cites work they call defective or late, and your check comes in thousands short. Some backcharges are legitimate. Many are not, and Texas law gives you real tools to fight the ones that are not.
A backcharge is money one party deducts from a contractor’s or subcontractor’s payment to cover the cost of fixing defective, late, or incomplete work. If a subcontractor installs something incorrectly, the general contractor can hire someone else to correct it and charge that cost back against what the subcontractor is owed. That is the legitimate version.
In Texas, a backcharge is not a free deduction. The Prompt Payment Act (Texas Property Code Chapter 28) only lets a party hold back payment for a genuine dispute, and only if they put the reasons in writing, keep the amount within the dispute, and give you a chance to fix the problem. A backcharge that skips any of those is where the trouble starts.
I had one client in particular who a well-known general contractor hired to provide shower doors for a large multifamily project. My client was hired to deliver the shower doors, and another subcontractor was hired to install them.
Halfway through the installation, my client receives a call from the general contractor claiming the shower doors have defects. My client went out to investigate the claims and discovered the general contractor had hired the drywall subcontractor to install the shower doors. This subcontractor had no experience installing this type of shower door and did not read my client’s installation instructions, so the shower doors did not work properly.
My client gave the drywall subcontractor instructions on how to fix the improperly installed shower doors and showed him how to install the remaining shower doors correctly. After the drywall subcontractor fixed the issue and completed installing the remaining shower doors, my client received a $300,000 backcharge.
He was being back charged for the overtime and other expenses the drywall subcontractor incurred to correct the problem and complete the project on time! My client was in shock and hired me to help resolve the issue.
Before we got to who was at fault for the extra expenses, I wanted to ensure the general contractor paid the drywall subcontractor an additional $300,000.
A basic rule in contracts is that you can’t recover a cost from someone unless you’ve incurred it. If the general contractor never paid the drywall subcontractor, they could not backcharge my client. I began asking for the drywall subcontractor’s contract, pay applications, and proof of payment to the drywall subcontractor. I had to confirm the $300,000 was extra, not part of the drywall sub’s original contract amount.
The only document they sent me was a lien waiver signed by the drywall subcontractor for $284,000.
I again explained to the general contractor that the information they provided did not confirm whether that payment was part of his original contract amount. Again, I asked them to provide the drywall contract, pay applications, and proof of payment. I told the general contractor that if they didn’t provide the requested information, I would have to move forward with filing a lien for the $300,000 my client still owed.
I filed a lien on the project, and eventually was provided with the drywall contract and the pay applications, however, they still would not provide proof of payment to the drywall subcontractor. Finally, I had no choice but to threaten to file a lawsuit to enforce my client’s lien unless they provided proof of payment to the drywall subcontractor.
Wouldn’t you know it, the next thing I hear is that the general contractor reached out to my client saying we owe them $300,000. Meaning they had never paid the drywall subcontractor the extra $300,000. What bullshit! Trying to cheat my client by deducting something that was never paid.
Now, valid backcharges exist. But before you agree to one, investigate it. Ask for proof of payment and anything else you need to confirm the backcharge is real.
Texas law sets rules for a legitimate backcharge. When a backcharge breaks one of these rules, that is your signal that it may not hold up.
No written notice. The Prompt Payment Act requires the withholding party to give you written notice stating the specific reasons for the deduction. A backcharge that appears as a silent line item on an invoice, with no notice or explanation, skips a step the law requires.
A vague reason. A backcharge that just says “defective work” is not enough. Texas law requires the notice to spell out what was wrong in detail. If the contractor cannot tell you exactly what they are charging for, the backcharge will not hold up.
No chance to fix it. If the issue is defective or incomplete work, Texas law gives you a reasonable opportunity to cure it before the contractor can charge you back for the cost. A contractor who hires someone else to redo your work without giving you a chance to fix it first has jumped the gun.
An amount bigger than the dispute. On a residential project, the most a party can withhold is 110% of the disputed amount. On a commercial project, it is 100%. A backcharge that is padded well beyond the real cost of the problem is withholding more than the law allows.
When a general contractor hits you with a backcharge, you are not stuck with it. The Texas Prompt Payment Act (Texas Property Code Chapter 28) treats a backcharge as a withholding, and it gives the contractor a narrow set of rules to follow and gives you real leverage when they do not.
They can only withhold for a genuine dispute. Chapter 28 lets a party withhold payment only when there is a good-faith dispute over the work. A backcharge used as a negotiating tactic or to pad margins is not a good-faith dispute.
They can only withhold the disputed amount. The cap is 110% of the disputed amount on residential projects and 100% on commercial projects. Anything beyond that is money the contractor is not allowed to hold.
Wrongful withholding costs them. If a contractor withholds your payment without a valid basis, the unpaid amount accrues interest at 1.5% per month (18% per year). If the dispute goes to court, the judge can order the losing side to pay the prevailing party’s attorney fees. That turns a bogus backcharge from a cost you absorb into a risk the contractor has to weigh.
You can demand proof. As the shower door case showed, a contractor cannot charge you for a cost they never paid. You have the right to ask for the contract, the pay applications, and proof of payment behind any backcharge. If they cannot produce it, the backcharge has no foundation.
They cannot contract around it. Chapter 28 cannot be waived. Even if your subcontract contains aggressive backcharge language, the protections of the Prompt Payment Act still apply.
The best time to defend against a bogus backcharge is before one lands. Build these into every project.
Fix your contract language. Your subcontract should spell out when a backcharge can be issued, the notice required, and the documentation the other side has to provide. If that language is vague or missing, negotiate it before the work starts.
Document the work. Photograph completed work, keep daily logs, and save every email about scope and quality. When a backcharge shows up months later, these records prove your work was done right.
Respond in writing, fast. If you receive a backcharge notice, respond in writing right away. Ask for the specific reason, supporting documentation, and proof of payment for the deduction. Silence can be read as agreement, so put your objection on record.
Check every deduction against the contract. Reconcile each invoice line by line. Bogus backcharges hide inside large payment applications, and a careful review catches them before they become permanent.
A bogus backcharge works because contractors assume the deduction is final. In Texas, it is not. The Prompt Payment Act limits what a contractor can withhold, requires justification, and makes them pay interest and attorney’s fees if they get it wrong. The contractors who keep their money know those rules and push back.
If a backcharge appears on your invoice and the numbers don’t add up, don’t sign off on it. The Cromeens Law Firm helps Texas contractors challenge improper backcharges and build contracts that prevent them on future jobs.
The backcharge may be on paper. Whether you actually owe it is a different question.
A backcharge is bogus when it skips what Texas law requires: written notice with specific reasons, an amount within the disputed cost, and a chance to fix the problem first. A legitimate backcharge follows those steps and is backed by a cost the contractor paid. If you can’t document it, you can challenge it.
Respond in writing as soon as the backcharge appears. Your subcontract may set a specific deadline to dispute deductions, so check it, but waiting never works in your favor.
A prompt written objection preserves your right to challenge the charge and starts the paper trail you will need.
No. Under the Texas Prompt Payment Act, a party can withhold no more than 110% of the disputed amount on a residential project, and 100% on a commercial project. A backcharge padded beyond the real cost of the problem is withholding more than the law allows.
Request the specific reason for the backcharge, the contract and pay applications behind it, and proof that the contractor paid the cost they are charging you. As the shower door case showed, a contractor who cannot prove they paid a cost cannot charge it back to you.
Wrongfully withheld payment accrues interest at 1.5% per month, which is 18% per year, and a court can order the losing side to pay your attorney’s fees. These rights come from the Texas Prompt Payment Act, and they give you real leverage to recover what you are owed.
Karalynn Cromeens is the Owner and Managing Partner of The Cromeens Law Firm, PLLC, with over 17 years of experience in construction, real estate, and business law. A published author and passionate advocate for contractors, she has dedicated her career to protecting the businesses her clients have built. Karalynn is on a mission to educate subcontractors on their legal rights, which inspired her books Quit Getting Screwed and Quit Getting Stiffed, as well as her podcast and The Subcontractor Institute.
