I think you handled the situation wonderfully.
I had a customer special order a quilt, filled out and signed my forms....ordered special materials for her...copied over 25 photos onto fabric for her.
Allowed her to take the top to her sisters to "show & tell," so she could collect "their parts" of the monies due.
Found out later, she used the quilt top at the 50th wedding anniversry, (without being quilted), but none the less returned it to me to quilt.
A day or two later, I asked for second installment of payment due, and she said, she was unable to get money from her sisters.
Long story, many phone calls...but needless to say I was stuck with a customer 50th wedding quilt top. Well, I kept her CD of photos, ripped the fabric photos out of the quilt, reused the sashing and backing purchased. However, I had also been given the original birth certificates and marriage licsene from this wonderful family to scan onto fabric....I informed her, the photo CD, photos, and certificates will stay in my possession until she pays as promised. (Have not ever been contacted again by her, and that was 4 years ago. But I lost nothing but time and gained a lot of experience from this. Hope you have many more pleasant experiences in the future. Most of my custom work has been with outstanding people since. When they interview my skills...I am now interviewing the clients! lol