[LONG post]
Howdy, apologies if I come off as inexperienced or stupid... it's because I am. I started up my own graphic design/social media advertising business (no employees, just me) about 2 months ago, and while things have been pretty good, I've come to a bit of a bump in the road. One of my first clients was a special case, and was referred to me by a close relative. She had received money from a grant, and the deadline to spend it was fast approaching- so she decided to hire me. It was a super-rush job, but I managed to put together an invoice and a "contract" which led to a $3600 cash payment up front. (more on that contract later)
Anyway, people told me she would be tough to work with from the start, but I didn't really care because that money eliminated almost all of my debt. So I went into it with an open mind, tried my absolute best, aaaaand.... 3 weeks later, I'm fired.
I could tell things weren't going super well, but I was trying as hard as humanly possible to get on the same page as her, and I figured we could work things out. Unfortunately, she just sent an email saying she wants to terminate our contract and be repaid as soon as possible.
So- here's the situation. She says she's willing to pay me for the work I've already done, which would be about $625. That still leaves me with around $3000 owed- but things get a little dicier from here. In my business plan (which she hasn't seen), I specified a cancellation fee equal to 25% of all lost revenue. The thing is, that was not written in the contract we both signed (although I'm pretty sure I told her verbally at the start). Normally this would immediately disqualify me for that 25%, but it's a little more complicated in this situation.
That "contract" was made by me, on a google doc, in about 20 minutes. It didn't get within 100 feet of a lawyer. So, as far as I know, it doesn't really have any legal standing if it were to come down to it. But obviously, I don't want to reach that level of conflict in the first place. So, I want to figure out how to best navigate this situation and secure my 25%, or find an even better outcome. And that "better" outcome makes things even weirder.
When we first made our agreement (October), she made me date the invoice for August. The contract was set to last about 3 months, so when reporting the invoice to the grant office, it would look like we'd already been working together and were just nearing the end of our contract. I'm not 100% clear on the specifics of the grant, but I'm pretty sure this is fishy behaviour (plus, she paid me in cash).
So, if I were to pay her back any money (even excluding my 25%), it would be between the two of us and she wouldn't have to report any of that money to the grant office. Therefore, if she chooses not to tell anyone, she will have essentially just "cheated" her way into 2-3 thousand dollars. I honestly don't care too much whether she gets in trouble or not, but I figured this might be a way to actually avoid the whole situation.
I wouldn't threaten her, but I would remind her that if she were to go through with this refund, she'd have to report it to the grant office and she'd likely lose all of the money. I think that would be enough to keep her on board, and I could pitch switching to an hourly schedule until I work off the remaining balance. Her main concern has been that I'm "not understanding the essence of her business", but really she just needs 3 hours to explain something that could have been said in a 3 sentence email. So if we switch to an hourly payment plan, she could have all the time she wants with me, and I could work off the balance pretty quickly.
Anyway, I know this post is super lengthy, but I could really use some advice here. I'm not concerned about losing the client relationship or hurting my reputation (she's well known to be difficult), but going back into debt would be pretty crushing right now. So, I'm hoping that someone out there will have read through this wall of text and come out of it with some insight.
Help me out if you can!! 
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