diff --git a/channeldb/db.go b/channeldb/db.go
index cf811aa6..c3f63234 100644
--- a/channeldb/db.go
+++ b/channeldb/db.go
@@ -137,7 +137,8 @@ type DB struct {
 	*bbolt.DB
 	dbPath string
 	graph  *ChannelGraph
-	now    func() time.Time
+
+	Now func() time.Time
 }
 
 // Open opens an existing channeldb. Any necessary schemas migrations due to
@@ -171,7 +172,7 @@ func Open(dbPath string, modifiers ...OptionModifier) (*DB, error) {
 	chanDB := &DB{
 		DB:     bdb,
 		dbPath: dbPath,
-		now:    time.Now,
+		Now:    time.Now,
 	}
 	chanDB.graph = newChannelGraph(
 		chanDB, opts.RejectCacheSize, opts.ChannelCacheSize,
diff --git a/channeldb/invoice_test.go b/channeldb/invoice_test.go
index 46687e25..d244f31b 100644
--- a/channeldb/invoice_test.go
+++ b/channeldb/invoice_test.go
@@ -7,6 +7,7 @@ import (
 	"time"
 
 	"github.com/davecgh/go-spew/spew"
+	"github.com/lightningnetwork/lnd/lntypes"
 	"github.com/lightningnetwork/lnd/lnwire"
 )
 
@@ -184,6 +185,69 @@ func TestInvoiceWorkflow(t *testing.T) {
 	}
 }
 
+// TestInvoiceCancelSingleHtlc tests that a single htlc can be canceled on the
+// invoice.
+func TestInvoiceCancelSingleHtlc(t *testing.T) {
+	t.Parallel()
+
+	db, cleanUp, err := makeTestDB()
+	defer cleanUp()
+	if err != nil {
+		t.Fatalf("unable to make test db: %v", err)
+	}
+
+	testInvoice := &Invoice{
+		Htlcs: map[CircuitKey]*InvoiceHTLC{},
+	}
+	testInvoice.Terms.Value = lnwire.NewMSatFromSatoshis(10000)
+	testInvoice.Terms.Features = emptyFeatures
+
+	var paymentHash lntypes.Hash
+	if _, err := db.AddInvoice(testInvoice, paymentHash); err != nil {
+		t.Fatalf("unable to find invoice: %v", err)
+	}
+
+	// Accept an htlc on this invoice.
+	key := CircuitKey{ChanID: lnwire.NewShortChanIDFromInt(1), HtlcID: 4}
+	invoice, err := db.UpdateInvoice(paymentHash,
+		func(invoice *Invoice) (*InvoiceUpdateDesc, error) {
+			return &InvoiceUpdateDesc{
+				AddHtlcs: map[CircuitKey]*HtlcAcceptDesc{
+					key: {
+						Amt: 500,
+					},
+				},
+			}, nil
+		})
+	if err != nil {
+		t.Fatalf("unable to add invoice htlc: %v", err)
+	}
+	if len(invoice.Htlcs) != 1 {
+		t.Fatalf("expected the htlc to be added")
+	}
+	if invoice.Htlcs[key].State != HtlcStateAccepted {
+		t.Fatalf("expected htlc in state accepted")
+	}
+
+	// Cancel the htlc again.
+	invoice, err = db.UpdateInvoice(paymentHash, func(invoice *Invoice) (*InvoiceUpdateDesc, error) {
+		return &InvoiceUpdateDesc{
+			CancelHtlcs: map[CircuitKey]struct{}{
+				key: {},
+			},
+		}, nil
+	})
+	if err != nil {
+		t.Fatalf("unable to cancel htlc: %v", err)
+	}
+	if len(invoice.Htlcs) != 1 {
+		t.Fatalf("expected the htlc to be present")
+	}
+	if invoice.Htlcs[key].State != HtlcStateCanceled {
+		t.Fatalf("expected htlc in state canceled")
+	}
+}
+
 // TestInvoiceTimeSeries tests that newly added invoices invoices, as well as
 // settled invoices are added to the database are properly placed in the add
 // add or settle index which serves as an event time series.
@@ -337,7 +401,7 @@ func TestDuplicateSettleInvoice(t *testing.T) {
 	if err != nil {
 		t.Fatalf("unable to make test db: %v", err)
 	}
-	db.now = func() time.Time { return time.Unix(1, 0) }
+	db.Now = func() time.Time { return time.Unix(1, 0) }
 
 	// We'll start out by creating an invoice and writing it to the DB.
 	amt := lnwire.NewMSatFromSatoshis(1000)
@@ -684,9 +748,11 @@ func getUpdateInvoice(amt lnwire.MilliSatoshi) InvoiceUpdateCallback {
 		}
 
 		update := &InvoiceUpdateDesc{
-			Preimage: invoice.Terms.PaymentPreimage,
-			State:    ContractSettled,
-			Htlcs: map[CircuitKey]*HtlcAcceptDesc{
+			State: &InvoiceStateUpdateDesc{
+				Preimage: invoice.Terms.PaymentPreimage,
+				NewState: ContractSettled,
+			},
+			AddHtlcs: map[CircuitKey]*HtlcAcceptDesc{
 				{}: {
 					Amt: amt,
 				},
diff --git a/channeldb/invoices.go b/channeldb/invoices.go
index d06ef46a..73668cdc 100644
--- a/channeldb/invoices.go
+++ b/channeldb/invoices.go
@@ -76,6 +76,18 @@ var (
 
 	// ErrInvoiceStillOpen is returned when the invoice is still open.
 	ErrInvoiceStillOpen = errors.New("invoice still open")
+
+	// ErrInvoiceCannotOpen is returned when an attempt is made to move an
+	// invoice to the open state.
+	ErrInvoiceCannotOpen = errors.New("cannot move invoice to open")
+
+	// ErrInvoiceCannotAccept is returned when an attempt is made to accept
+	// an invoice while the invoice is not in the open state.
+	ErrInvoiceCannotAccept = errors.New("cannot accept invoice")
+
+	// ErrInvoicePreimageMismatch is returned when the preimage doesn't
+	// match the invoice hash.
+	ErrInvoicePreimageMismatch = errors.New("preimage does not match")
 )
 
 const (
@@ -313,15 +325,24 @@ type HtlcAcceptDesc struct {
 // InvoiceUpdateDesc describes the changes that should be applied to the
 // invoice.
 type InvoiceUpdateDesc struct {
-	// State is the new state that this invoice should progress to.
-	State ContractState
+	// State is the new state that this invoice should progress to. If nil,
+	// the state is left unchanged.
+	State *InvoiceStateUpdateDesc
 
-	// Htlcs describes the changes that need to be made to the invoice htlcs
-	// in the database. Htlc map entries with their value set should be
-	// added. If the map value is nil, the htlc should be canceled.
-	Htlcs map[CircuitKey]*HtlcAcceptDesc
+	// CancelHtlcs describes the htlcs that need to be canceled.
+	CancelHtlcs map[CircuitKey]struct{}
 
-	// Preimage must be set to the preimage when state is settled.
+	// AddHtlcs describes the newly accepted htlcs that need to be added to
+	// the invoice.
+	AddHtlcs map[CircuitKey]*HtlcAcceptDesc
+}
+
+// InvoiceStateUpdateDesc describes an invoice-level state transition.
+type InvoiceStateUpdateDesc struct {
+	// NewState is the new state that this invoice should progress to.
+	NewState ContractState
+
+	// Preimage must be set to the preimage when NewState is settled.
 	Preimage lntypes.Preimage
 }
 
@@ -1229,8 +1250,6 @@ func (d *DB) updateInvoice(hash lntypes.Hash, invoices, settleIndex *bbolt.Bucke
 		return nil, err
 	}
 
-	preUpdateState := invoice.State
-
 	// Create deep copy to prevent any accidental modification in the
 	// callback.
 	invoiceCopy := copyInvoice(&invoice)
@@ -1241,79 +1260,102 @@ func (d *DB) updateInvoice(hash lntypes.Hash, invoices, settleIndex *bbolt.Bucke
 		return &invoice, err
 	}
 
-	// Update invoice state.
-	invoice.State = update.State
+	// If there is nothing to update, return early.
+	if update == nil {
+		return &invoice, nil
+	}
 
-	now := d.now()
+	now := d.Now()
 
-	// Update htlc set.
-	for key, htlcUpdate := range update.Htlcs {
-		htlc, ok := invoice.Htlcs[key]
-
-		// No update means the htlc needs to be canceled.
-		if htlcUpdate == nil {
-			if !ok {
-				return nil, fmt.Errorf("unknown htlc %v", key)
-			}
-			if htlc.State != HtlcStateAccepted {
-				return nil, fmt.Errorf("can only cancel " +
-					"accepted htlcs")
-			}
-
-			htlc.State = HtlcStateCanceled
-			htlc.ResolveTime = now
-			invoice.AmtPaid -= htlc.Amt
-
-			continue
+	// Update invoice state if the update descriptor indicates an invoice
+	// state change.
+	if update.State != nil {
+		err := updateInvoiceState(&invoice, hash, *update.State)
+		if err != nil {
+			return nil, err
 		}
 
-		// Add new htlc paying to the invoice.
-		if ok {
-			return nil, fmt.Errorf("htlc %v already exists", key)
+		if update.State.NewState == ContractSettled {
+			err := setSettleMetaFields(
+				settleIndex, invoiceNum, &invoice, now,
+			)
+			if err != nil {
+				return nil, err
+			}
 		}
-		htlc = &InvoiceHTLC{
+	}
+
+	// Process add actions from update descriptor.
+	for key, htlcUpdate := range update.AddHtlcs {
+		if _, exists := invoice.Htlcs[key]; exists {
+			return nil, fmt.Errorf("duplicate add of htlc %v", key)
+		}
+		htlc := &InvoiceHTLC{
 			Amt:          htlcUpdate.Amt,
 			Expiry:       htlcUpdate.Expiry,
 			AcceptHeight: uint32(htlcUpdate.AcceptHeight),
 			AcceptTime:   now,
-		}
-		if preUpdateState == ContractSettled {
-			htlc.State = HtlcStateSettled
-			htlc.ResolveTime = now
-		} else {
-			htlc.State = HtlcStateAccepted
+			State:        HtlcStateAccepted,
 		}
 
 		invoice.Htlcs[key] = htlc
-		invoice.AmtPaid += htlc.Amt
 	}
 
-	// If invoice moved to the settled state, update settle index and settle
-	// time.
-	if preUpdateState != invoice.State &&
-		invoice.State == ContractSettled {
-
-		if update.Preimage.Hash() != hash {
-			return nil, fmt.Errorf("preimage does not match")
-		}
-		invoice.Terms.PaymentPreimage = update.Preimage
-
-		// Settle all accepted htlcs.
-		for _, htlc := range invoice.Htlcs {
-			if htlc.State != HtlcStateAccepted {
-				continue
+	// Align htlc states with invoice state and recalculate amount paid.
+	var (
+		amtPaid     lnwire.MilliSatoshi
+		cancelHtlcs = update.CancelHtlcs
+	)
+	for key, htlc := range invoice.Htlcs {
+		// Check whether this htlc needs to be canceled. If it does,
+		// update the htlc state to Canceled.
+		_, cancel := cancelHtlcs[key]
+		if cancel {
+			// Consistency check to verify that there is no overlap
+			// between the add and cancel sets.
+			if _, added := update.AddHtlcs[key]; added {
+				return nil, fmt.Errorf("added htlc %v canceled",
+					key)
 			}
 
-			htlc.State = HtlcStateSettled
-			htlc.ResolveTime = now
+			err := cancelSingleHtlc(now, htlc, invoice.State)
+			if err != nil {
+				return nil, err
+			}
+
+			// Delete processed cancel action, so that we can check
+			// later that there are no actions left.
+			delete(cancelHtlcs, key)
+
+			continue
 		}
 
-		err := setSettleFields(settleIndex, invoiceNum, &invoice, now)
+		// The invoice state may have changed and this could have
+		// implications for the states of the individual htlcs. Align
+		// the htlc state with the current invoice state.
+		err := updateHtlc(now, htlc, invoice.State)
 		if err != nil {
 			return nil, err
 		}
+
+		// Update the running amount paid to this invoice. We don't
+		// include accepted htlcs when the invoice is still open.
+		if invoice.State != ContractOpen &&
+			(htlc.State == HtlcStateAccepted ||
+				htlc.State == HtlcStateSettled) {
+
+			amtPaid += htlc.Amt
+		}
+	}
+	invoice.AmtPaid = amtPaid
+
+	// Verify that we didn't get an action for htlcs that are not present on
+	// the invoice.
+	if len(cancelHtlcs) > 0 {
+		return nil, errors.New("cancel action on non-existent htlc(s)")
 	}
 
+	// Reserialize and update invoice.
 	var buf bytes.Buffer
 	if err := serializeInvoice(&buf, &invoice); err != nil {
 		return nil, err
@@ -1326,7 +1368,119 @@ func (d *DB) updateInvoice(hash lntypes.Hash, invoices, settleIndex *bbolt.Bucke
 	return &invoice, nil
 }
 
-func setSettleFields(settleIndex *bbolt.Bucket, invoiceNum []byte,
+// updateInvoiceState validates and processes an invoice state update.
+func updateInvoiceState(invoice *Invoice, hash lntypes.Hash,
+	update InvoiceStateUpdateDesc) error {
+
+	// Returning to open is never allowed from any state.
+	if update.NewState == ContractOpen {
+		return ErrInvoiceCannotOpen
+	}
+
+	switch invoice.State {
+
+	// Once a contract is accepted, we can only transition to settled or
+	// canceled. Forbid transitioning back into this state. Otherwise this
+	// state is identical to ContractOpen, so we fallthrough to apply the
+	// same checks that we apply to open invoices.
+	case ContractAccepted:
+		if update.NewState == ContractAccepted {
+			return ErrInvoiceCannotAccept
+		}
+
+		fallthrough
+
+	// If a contract is open, permit a state transition to accepted, settled
+	// or canceled. The only restriction is on transitioning to settled
+	// where we ensure the preimage is valid.
+	case ContractOpen:
+		if update.NewState == ContractSettled {
+			// Validate preimage.
+			if update.Preimage.Hash() != hash {
+				return ErrInvoicePreimageMismatch
+			}
+			invoice.Terms.PaymentPreimage = update.Preimage
+		}
+
+	// Once settled, we are in a terminal state.
+	case ContractSettled:
+		return ErrInvoiceAlreadySettled
+
+	// Once canceled, we are in a terminal state.
+	case ContractCanceled:
+		return ErrInvoiceAlreadyCanceled
+
+	default:
+		return errors.New("unknown state transition")
+	}
+
+	invoice.State = update.NewState
+
+	return nil
+}
+
+// cancelSingleHtlc validates cancelation of a single htlc and update its state.
+func cancelSingleHtlc(resolveTime time.Time, htlc *InvoiceHTLC,
+	invState ContractState) error {
+
+	// It is only possible to cancel individual htlcs on an open invoice.
+	if invState != ContractOpen {
+		return fmt.Errorf("htlc canceled on invoice in "+
+			"state %v", invState)
+	}
+
+	// It is only possible if the htlc is still pending.
+	if htlc.State != HtlcStateAccepted {
+		return fmt.Errorf("htlc canceled in state %v",
+			htlc.State)
+	}
+
+	htlc.State = HtlcStateCanceled
+	htlc.ResolveTime = resolveTime
+
+	return nil
+}
+
+// updateHtlc aligns the state of an htlc with the given invoice state.
+func updateHtlc(resolveTime time.Time, htlc *InvoiceHTLC,
+	invState ContractState) error {
+
+	switch invState {
+
+	case ContractSettled:
+		if htlc.State == HtlcStateAccepted {
+			htlc.State = HtlcStateSettled
+			htlc.ResolveTime = resolveTime
+		}
+
+	case ContractCanceled:
+		switch htlc.State {
+
+		case HtlcStateAccepted:
+			htlc.State = HtlcStateCanceled
+			htlc.ResolveTime = resolveTime
+
+		case HtlcStateSettled:
+			return fmt.Errorf("cannot have a settled htlc with " +
+				"invoice in state canceled")
+		}
+
+	case ContractOpen, ContractAccepted:
+		if htlc.State == HtlcStateSettled {
+			return fmt.Errorf("cannot have a settled htlc with "+
+				"invoice in state %v", invState)
+		}
+
+	default:
+		return errors.New("unknown state transition")
+	}
+
+	return nil
+}
+
+// setSettleMetaFields updates the metadata associated with settlement of an
+// invoice.
+func setSettleMetaFields(settleIndex *bbolt.Bucket, invoiceNum []byte,
 	invoice *Invoice, now time.Time) error {
 
 	// Now that we know the invoice hasn't already been settled, we'll
@@ -1343,7 +1497,6 @@ func setSettleFields(settleIndex *bbolt.Bucket, invoiceNum []byte,
 		return err
 	}
 
-	invoice.State = ContractSettled
 	invoice.SettleDate = now
 	invoice.SettleIndex = nextSettleSeqNo
 
diff --git a/invoices/invoiceregistry.go b/invoices/invoiceregistry.go
index 51b57c09..f388a666 100644
--- a/invoices/invoiceregistry.go
+++ b/invoices/invoiceregistry.go
@@ -24,9 +24,6 @@ var (
 	// ErrShuttingDown is returned when an operation failed because the
 	// invoice registry is shutting down.
 	ErrShuttingDown = errors.New("invoice registry shutting down")
-
-	// errNoUpdate is returned when no invoice updated is required.
-	errNoUpdate = errors.New("no update needed")
 )
 
 // HodlEvent describes how an htlc should be resolved. If HodlEvent.Preimage is
@@ -415,9 +412,8 @@ func (i *InvoiceRegistry) LookupInvoice(rHash lntypes.Hash) (channeldb.Invoice,
 	return i.cdb.LookupInvoice(rHash)
 }
 
-// NotifyExitHopHtlc attempts to mark an invoice as settled. If the invoice is a
-// debug invoice, then this method is a noop as debug invoices are never fully
-// settled. The return value describes how the htlc should be resolved.
+// NotifyExitHopHtlc attempts to mark an invoice as settled. The return value
+// describes how the htlc should be resolved.
 //
 // When the preimage of the invoice is not yet known (hodl invoice), this
 // function moves the invoice to the accepted state. When SettleHoldInvoice is
@@ -439,111 +435,48 @@ func (i *InvoiceRegistry) NotifyExitHopHtlc(rHash lntypes.Hash,
 			rHash[:], s, amtPaid, expiry, circuitKey)
 	}
 
-	// Default is to not update subscribers after the invoice update.
-	updateSubscribers := false
-
-	updateInvoice := func(inv *channeldb.Invoice) (
-		*channeldb.InvoiceUpdateDesc, error) {
-
-		// Don't update the invoice when this is a replayed htlc.
-		htlc, ok := inv.Htlcs[circuitKey]
-		if ok {
-			switch htlc.State {
-			case channeldb.HtlcStateCanceled:
-				debugLog("replayed htlc to canceled invoice")
-
-			case channeldb.HtlcStateAccepted:
-				debugLog("replayed htlc to accepted invoice")
-
-			case channeldb.HtlcStateSettled:
-				debugLog("replayed htlc to settled invoice")
-
-			default:
-				return nil, errors.New("unexpected htlc state")
-			}
-
-			return nil, errNoUpdate
-		}
-
-		// If the invoice is already canceled, there is no further
-		// checking to do.
-		if inv.State == channeldb.ContractCanceled {
-			debugLog("invoice already canceled")
-			return nil, errNoUpdate
-		}
-
-		// If an invoice amount is specified, check that enough
-		// is paid. Also check this for duplicate payments if
-		// the invoice is already settled or accepted.
-		if inv.Terms.Value > 0 && amtPaid < inv.Terms.Value {
-			debugLog("amount too low")
-			return nil, errNoUpdate
-		}
-
-		// The invoice is still open. Check the expiry.
-		if expiry < uint32(currentHeight+i.finalCltvRejectDelta) {
-			debugLog("expiry too soon")
-			return nil, errNoUpdate
-		}
-
-		if expiry < uint32(currentHeight+inv.Terms.FinalCltvDelta) {
-			debugLog("expiry too soon")
-			return nil, errNoUpdate
-		}
-
-		// Record HTLC in the invoice database.
-		newHtlcs := map[channeldb.CircuitKey]*channeldb.HtlcAcceptDesc{
-			circuitKey: {
-				Amt:          amtPaid,
-				Expiry:       expiry,
-				AcceptHeight: currentHeight,
-			},
-		}
-
-		update := channeldb.InvoiceUpdateDesc{
-			Htlcs: newHtlcs,
-		}
-
-		// Don't update invoice state if we are accepting a duplicate
-		// payment. We do accept or settle the HTLC.
-		switch inv.State {
-		case channeldb.ContractAccepted:
-			debugLog("accepting duplicate payment to accepted invoice")
-			update.State = channeldb.ContractAccepted
-			return &update, nil
-
-		case channeldb.ContractSettled:
-			debugLog("accepting duplicate payment to settled invoice")
-			update.State = channeldb.ContractSettled
-			return &update, nil
-		}
-
-		// Check to see if we can settle or this is an hold invoice and
-		// we need to wait for the preimage.
-		holdInvoice := inv.Terms.PaymentPreimage == channeldb.UnknownPreimage
-		if holdInvoice {
-			debugLog("accepted")
-			update.State = channeldb.ContractAccepted
-		} else {
-			debugLog("settled")
-			update.Preimage = inv.Terms.PaymentPreimage
-			update.State = channeldb.ContractSettled
-		}
-
-		updateSubscribers = true
-
-		return &update, nil
+	// Create the update context containing the relevant details of the
+	// incoming htlc.
+	updateCtx := invoiceUpdateCtx{
+		circuitKey:           circuitKey,
+		amtPaid:              amtPaid,
+		expiry:               expiry,
+		currentHeight:        currentHeight,
+		finalCltvRejectDelta: i.finalCltvRejectDelta,
 	}
 
 	// We'll attempt to settle an invoice matching this rHash on disk (if
-	// one exists). The callback will set the resolution action that is
-	// returned to the link or contract resolver.
-	invoice, err := i.cdb.UpdateInvoice(rHash, updateInvoice)
-	if err != nil && err != errNoUpdate {
+	// one exists). The callback will update the invoice state and/or htlcs.
+	var (
+		result            updateResult
+		updateSubscribers bool
+	)
+	invoice, err := i.cdb.UpdateInvoice(
+		rHash,
+		func(inv *channeldb.Invoice) (
+			*channeldb.InvoiceUpdateDesc, error) {
+
+			updateDesc, res, err := updateInvoice(&updateCtx, inv)
+			if err != nil {
+				return nil, err
+			}
+
+			// Only send an update if the invoice state was changed.
+			updateSubscribers = updateDesc != nil &&
+				updateDesc.State != nil
+
+			// Assign result to outer scope variable.
+			result = res
+
+			return updateDesc, nil
+		},
+	)
+	if err != nil {
 		debugLog(err.Error())
 
 		return nil, err
 	}
+	debugLog(result.String())
 
 	if updateSubscribers {
 		i.notifyClients(rHash, invoice, invoice.State)
@@ -607,8 +540,10 @@ func (i *InvoiceRegistry) SettleHodlInvoice(preimage lntypes.Preimage) error {
 		}
 
 		return &channeldb.InvoiceUpdateDesc{
-			State:    channeldb.ContractSettled,
-			Preimage: preimage,
+			State: &channeldb.InvoiceStateUpdateDesc{
+				NewState: channeldb.ContractSettled,
+				Preimage: preimage,
+			},
 		}, nil
 	}
 
@@ -655,39 +590,13 @@ func (i *InvoiceRegistry) CancelInvoice(payHash lntypes.Hash) error {
 	updateInvoice := func(invoice *channeldb.Invoice) (
 		*channeldb.InvoiceUpdateDesc, error) {
 
-		switch invoice.State {
-		case channeldb.ContractSettled:
-			return nil, channeldb.ErrInvoiceAlreadySettled
-		case channeldb.ContractCanceled:
-			return nil, channeldb.ErrInvoiceAlreadyCanceled
-		}
-
-		// Mark individual held htlcs as canceled.
-		canceledHtlcs := make(
-			map[channeldb.CircuitKey]*channeldb.HtlcAcceptDesc,
-		)
-		for key, htlc := range invoice.Htlcs {
-			switch htlc.State {
-
-			// If we get here, there shouldn't be any settled htlcs.
-			case channeldb.HtlcStateSettled:
-				return nil, errors.New("cannot cancel " +
-					"invoice with settled htlc(s)")
-
-			// Don't cancel htlcs that were already canceled,
-			// because it would incorrectly modify the invoice paid
-			// amt.
-			case channeldb.HtlcStateCanceled:
-				continue
-			}
-
-			canceledHtlcs[key] = nil
-		}
-
-		// Move invoice to the canceled state.
+		// Move invoice to the canceled state. Rely on validation in
+		// channeldb to return an error if the invoice is already
+		// settled or canceled.
 		return &channeldb.InvoiceUpdateDesc{
-			Htlcs: canceledHtlcs,
-			State: channeldb.ContractCanceled,
+			State: &channeldb.InvoiceStateUpdateDesc{
+				NewState: channeldb.ContractCanceled,
+			},
 		}, nil
 	}
 
diff --git a/invoices/invoiceregistry_test.go b/invoices/invoiceregistry_test.go
index 9e6fc62a..bb14ba12 100644
--- a/invoices/invoiceregistry_test.go
+++ b/invoices/invoiceregistry_test.go
@@ -9,6 +9,7 @@ import (
 	"github.com/lightningnetwork/lnd/channeldb"
 	"github.com/lightningnetwork/lnd/lntypes"
 	"github.com/lightningnetwork/lnd/lnwire"
+	"github.com/lightningnetwork/lnd/record"
 )
 
 var (
@@ -32,10 +33,13 @@ var (
 	testFeatures = lnwire.NewFeatureVector(
 		nil, lnwire.Features,
 	)
+
+	testPayload = &mockPayload{}
 )
 
 var (
-	testInvoice = &channeldb.Invoice{
+	testInvoiceAmt = lnwire.MilliSatoshi(100000)
+	testInvoice    = &channeldb.Invoice{
 		Terms: channeldb.ContractTerm{
 			PaymentPreimage: preimage,
 			Value:           lnwire.MilliSatoshi(100000),
@@ -46,19 +50,26 @@ var (
 	testHodlInvoice = &channeldb.Invoice{
 		Terms: channeldb.ContractTerm{
 			PaymentPreimage: channeldb.UnknownPreimage,
-			Value:           lnwire.MilliSatoshi(100000),
+			Value:           testInvoiceAmt,
 			Features:        testFeatures,
 		},
 	}
 )
 
-func newTestContext(t *testing.T) (*InvoiceRegistry, func()) {
+type testContext struct {
+	registry *InvoiceRegistry
+
+	cleanup func()
+	t       *testing.T
+}
+
+func newTestContext(t *testing.T) *testContext {
 	cdb, cleanup, err := newDB()
 	if err != nil {
 		t.Fatal(err)
 	}
 
-	// Instantiate and start the invoice registry.
+	// Instantiate and start the invoice ctx.registry.
 	registry := NewRegistry(cdb, testFinalCltvRejectDelta)
 
 	err = registry.Start()
@@ -67,10 +78,16 @@ func newTestContext(t *testing.T) (*InvoiceRegistry, func()) {
 		t.Fatal(err)
 	}
 
-	return registry, func() {
-		registry.Stop()
-		cleanup()
+	ctx := testContext{
+		registry: registry,
+		t:        t,
+		cleanup: func() {
+			registry.Stop()
+			cleanup()
+		},
 	}
+
+	return &ctx
 }
 
 func getCircuitKey(htlcID uint64) channeldb.CircuitKey {
@@ -84,14 +101,14 @@ func getCircuitKey(htlcID uint64) channeldb.CircuitKey {
 
 // TestSettleInvoice tests settling of an invoice and related notifications.
 func TestSettleInvoice(t *testing.T) {
-	registry, cleanup := newTestContext(t)
-	defer cleanup()
+	ctx := newTestContext(t)
+	defer ctx.cleanup()
 
-	allSubscriptions := registry.SubscribeNotifications(0, 0)
+	allSubscriptions := ctx.registry.SubscribeNotifications(0, 0)
 	defer allSubscriptions.Cancel()
 
 	// Subscribe to the not yet existing invoice.
-	subscription, err := registry.SubscribeSingleInvoice(hash)
+	subscription, err := ctx.registry.SubscribeSingleInvoice(hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -102,7 +119,7 @@ func TestSettleInvoice(t *testing.T) {
 	}
 
 	// Add the invoice.
-	addIdx, err := registry.AddInvoice(testInvoice, hash)
+	addIdx, err := ctx.registry.AddInvoice(testInvoice, hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -137,10 +154,10 @@ func TestSettleInvoice(t *testing.T) {
 	hodlChan := make(chan interface{}, 1)
 
 	// Try to settle invoice with an htlc that expires too soon.
-	event, err := registry.NotifyExitHopHtlc(
+	event, err := ctx.registry.NotifyExitHopHtlc(
 		hash, testInvoice.Terms.Value,
 		uint32(testCurrentHeight)+testInvoiceCltvDelta-1,
-		testCurrentHeight, getCircuitKey(10), hodlChan, nil,
+		testCurrentHeight, getCircuitKey(10), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatal(err)
@@ -155,9 +172,9 @@ func TestSettleInvoice(t *testing.T) {
 
 	// Settle invoice with a slightly higher amount.
 	amtPaid := lnwire.MilliSatoshi(100500)
-	_, err = registry.NotifyExitHopHtlc(
+	_, err = ctx.registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatal(err)
@@ -191,9 +208,9 @@ func TestSettleInvoice(t *testing.T) {
 
 	// Try to settle again with the same htlc id. We need this idempotent
 	// behaviour after a restart.
-	event, err = registry.NotifyExitHopHtlc(
+	event, err = ctx.registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("unexpected NotifyExitHopHtlc error: %v", err)
@@ -205,9 +222,9 @@ func TestSettleInvoice(t *testing.T) {
 	// Try to settle again with a new higher-valued htlc. This payment
 	// should also be accepted, to prevent any change in behaviour for a
 	// paid invoice that may open up a probe vector.
-	event, err = registry.NotifyExitHopHtlc(
+	event, err = ctx.registry.NotifyExitHopHtlc(
 		hash, amtPaid+600, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(1), hodlChan, nil,
+		getCircuitKey(1), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("unexpected NotifyExitHopHtlc error: %v", err)
@@ -218,9 +235,9 @@ func TestSettleInvoice(t *testing.T) {
 
 	// Try to settle again with a lower amount. This should fail just as it
 	// would have failed if it were the first payment.
-	event, err = registry.NotifyExitHopHtlc(
+	event, err = ctx.registry.NotifyExitHopHtlc(
 		hash, amtPaid-600, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(2), hodlChan, nil,
+		getCircuitKey(2), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("unexpected NotifyExitHopHtlc error: %v", err)
@@ -231,7 +248,7 @@ func TestSettleInvoice(t *testing.T) {
 
 	// Check that settled amount is equal to the sum of values of the htlcs
 	// 0 and 1.
-	inv, err := registry.LookupInvoice(hash)
+	inv, err := ctx.registry.LookupInvoice(hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -240,7 +257,7 @@ func TestSettleInvoice(t *testing.T) {
 	}
 
 	// Try to cancel.
-	err = registry.CancelInvoice(hash)
+	err = ctx.registry.CancelInvoice(hash)
 	if err != channeldb.ErrInvoiceAlreadySettled {
 		t.Fatal("expected cancelation of a settled invoice to fail")
 	}
@@ -255,20 +272,20 @@ func TestSettleInvoice(t *testing.T) {
 
 // TestCancelInvoice tests cancelation of an invoice and related notifications.
 func TestCancelInvoice(t *testing.T) {
-	registry, cleanup := newTestContext(t)
-	defer cleanup()
+	ctx := newTestContext(t)
+	defer ctx.cleanup()
 
-	allSubscriptions := registry.SubscribeNotifications(0, 0)
+	allSubscriptions := ctx.registry.SubscribeNotifications(0, 0)
 	defer allSubscriptions.Cancel()
 
 	// Try to cancel the not yet existing invoice. This should fail.
-	err := registry.CancelInvoice(hash)
+	err := ctx.registry.CancelInvoice(hash)
 	if err != channeldb.ErrInvoiceNotFound {
 		t.Fatalf("expected ErrInvoiceNotFound, but got %v", err)
 	}
 
 	// Subscribe to the not yet existing invoice.
-	subscription, err := registry.SubscribeSingleInvoice(hash)
+	subscription, err := ctx.registry.SubscribeSingleInvoice(hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -280,7 +297,7 @@ func TestCancelInvoice(t *testing.T) {
 
 	// Add the invoice.
 	amt := lnwire.MilliSatoshi(100000)
-	_, err = registry.AddInvoice(testInvoice, hash)
+	_, err = ctx.registry.AddInvoice(testInvoice, hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -312,7 +329,7 @@ func TestCancelInvoice(t *testing.T) {
 	}
 
 	// Cancel invoice.
-	err = registry.CancelInvoice(hash)
+	err = ctx.registry.CancelInvoice(hash)
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -335,7 +352,7 @@ func TestCancelInvoice(t *testing.T) {
 	// subscribers (backwards compatibility).
 
 	// Try to cancel again.
-	err = registry.CancelInvoice(hash)
+	err = ctx.registry.CancelInvoice(hash)
 	if err != nil {
 		t.Fatal("expected cancelation of a canceled invoice to succeed")
 	}
@@ -343,9 +360,9 @@ func TestCancelInvoice(t *testing.T) {
 	// Notify arrival of a new htlc paying to this invoice. This should
 	// result in a cancel event.
 	hodlChan := make(chan interface{})
-	event, err := registry.NotifyExitHopHtlc(
+	event, err := ctx.registry.NotifyExitHopHtlc(
 		hash, amt, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatal("expected settlement of a canceled invoice to succeed")
@@ -371,7 +388,7 @@ func TestSettleHoldInvoice(t *testing.T) {
 	}
 	defer cleanup()
 
-	// Instantiate and start the invoice registry.
+	// Instantiate and start the invoice ctx.registry.
 	registry := NewRegistry(cdb, testFinalCltvRejectDelta)
 
 	err = registry.Start()
@@ -423,7 +440,7 @@ func TestSettleHoldInvoice(t *testing.T) {
 	// should be possible.
 	event, err := registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -435,7 +452,7 @@ func TestSettleHoldInvoice(t *testing.T) {
 	// Test idempotency.
 	event, err = registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -448,7 +465,7 @@ func TestSettleHoldInvoice(t *testing.T) {
 	// is a replay.
 	event, err = registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight+10,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -461,7 +478,7 @@ func TestSettleHoldInvoice(t *testing.T) {
 	// requirement. It should be rejected.
 	event, err = registry.NotifyExitHopHtlc(
 		hash, amtPaid, 1, testCurrentHeight,
-		getCircuitKey(1), hodlChan, nil,
+		getCircuitKey(1), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -539,7 +556,7 @@ func TestCancelHoldInvoice(t *testing.T) {
 	}
 	defer cleanup()
 
-	// Instantiate and start the invoice registry.
+	// Instantiate and start the invoice ctx.registry.
 	registry := NewRegistry(cdb, testFinalCltvRejectDelta)
 
 	err = registry.Start()
@@ -561,7 +578,7 @@ func TestCancelHoldInvoice(t *testing.T) {
 	// should be possible.
 	event, err := registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -586,7 +603,7 @@ func TestCancelHoldInvoice(t *testing.T) {
 	// accept height.
 	event, err = registry.NotifyExitHopHtlc(
 		hash, amtPaid, testHtlcExpiry, testCurrentHeight+1,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != nil {
 		t.Fatalf("expected settle to succeed but got %v", err)
@@ -629,18 +646,26 @@ func newDB() (*channeldb.DB, func(), error) {
 // the exit hop, but in htlcIncomingContestResolver it is called with forwarded
 // htlc hashes as well.
 func TestUnknownInvoice(t *testing.T) {
-	registry, cleanup := newTestContext(t)
-	defer cleanup()
+	ctx := newTestContext(t)
+	defer ctx.cleanup()
 
 	// Notify arrival of a new htlc paying to this invoice. This should
 	// succeed.
 	hodlChan := make(chan interface{})
 	amt := lnwire.MilliSatoshi(100000)
-	_, err := registry.NotifyExitHopHtlc(
+	_, err := ctx.registry.NotifyExitHopHtlc(
 		hash, amt, testHtlcExpiry, testCurrentHeight,
-		getCircuitKey(0), hodlChan, nil,
+		getCircuitKey(0), hodlChan, testPayload,
 	)
 	if err != channeldb.ErrInvoiceNotFound {
 		t.Fatal("expected invoice not found error")
 	}
 }
+
+type mockPayload struct {
+	mpp *record.MPP
+}
+
+func (p *mockPayload) MultiPath() *record.MPP {
+	return p.mpp
+}
diff --git a/invoices/update.go b/invoices/update.go
new file mode 100644
index 00000000..7a1b0324
--- /dev/null
+++ b/invoices/update.go
@@ -0,0 +1,164 @@
+package invoices
+
+import (
+	"errors"
+
+	"github.com/lightningnetwork/lnd/channeldb"
+	"github.com/lightningnetwork/lnd/lnwire"
+)
+
+// updateResult is the result of the invoice update call.
+type updateResult uint8
+
+const (
+	resultInvalid updateResult = iota
+	resultReplayToCanceled
+	resultReplayToAccepted
+	resultReplayToSettled
+	resultInvoiceAlreadyCanceled
+	resultAmountTooLow
+	resultExpiryTooSoon
+	resultDuplicateToAccepted
+	resultDuplicateToSettled
+	resultAccepted
+	resultSettled
+)
+
+// String returns a human-readable representation of the invoice update result.
+func (u updateResult) String() string {
+	switch u {
+
+	case resultInvalid:
+		return "invalid"
+
+	case resultReplayToCanceled:
+		return "replayed htlc to canceled invoice"
+
+	case resultReplayToAccepted:
+		return "replayed htlc to accepted invoice"
+
+	case resultReplayToSettled:
+		return "replayed htlc to settled invoice"
+
+	case resultInvoiceAlreadyCanceled:
+		return "invoice already canceled"
+
+	case resultAmountTooLow:
+		return "amount too low"
+
+	case resultExpiryTooSoon:
+		return "expiry too soon"
+
+	case resultDuplicateToAccepted:
+		return "accepting duplicate payment to accepted invoice"
+
+	case resultDuplicateToSettled:
+		return "accepting duplicate payment to settled invoice"
+
+	case resultAccepted:
+		return "accepted"
+
+	case resultSettled:
+		return "settled"
+
+	default:
+		return "unknown"
+	}
+}
+
+// invoiceUpdateCtx is an object that describes the context for the invoice
+// update to be carried out.
+type invoiceUpdateCtx struct {
+	circuitKey           channeldb.CircuitKey
+	amtPaid              lnwire.MilliSatoshi
+	expiry               uint32
+	currentHeight        int32
+	finalCltvRejectDelta int32
+}
+
+// updateInvoice is a callback for DB.UpdateInvoice that contains the invoice
+// settlement logic.
+func updateInvoice(ctx *invoiceUpdateCtx, inv *channeldb.Invoice) (
+	*channeldb.InvoiceUpdateDesc, updateResult, error) {
+
+	// Don't update the invoice when this is a replayed htlc.
+	htlc, ok := inv.Htlcs[ctx.circuitKey]
+	if ok {
+		switch htlc.State {
+		case channeldb.HtlcStateCanceled:
+			return nil, resultReplayToCanceled, nil
+
+		case channeldb.HtlcStateAccepted:
+			return nil, resultReplayToAccepted, nil
+
+		case channeldb.HtlcStateSettled:
+			return nil, resultReplayToSettled, nil
+
+		default:
+			return nil, 0, errors.New("unknown htlc state")
+		}
+	}
+
+	// If the invoice is already canceled, there is no further checking to
+	// do.
+	if inv.State == channeldb.ContractCanceled {
+		return nil, resultInvoiceAlreadyCanceled, nil
+	}
+
+	// If an invoice amount is specified, check that enough is paid. Also
+	// check this for duplicate payments if the invoice is already settled
+	// or accepted. In case this is a zero-valued invoice, it will always be
+	// enough.
+	if ctx.amtPaid < inv.Terms.Value {
+		return nil, resultAmountTooLow, nil
+	}
+
+	// The invoice is still open. Check the expiry.
+	if ctx.expiry < uint32(ctx.currentHeight+ctx.finalCltvRejectDelta) {
+		return nil, resultExpiryTooSoon, nil
+	}
+
+	if ctx.expiry < uint32(ctx.currentHeight+inv.Terms.FinalCltvDelta) {
+		return nil, resultExpiryTooSoon, nil
+	}
+
+	// Record HTLC in the invoice database.
+	newHtlcs := map[channeldb.CircuitKey]*channeldb.HtlcAcceptDesc{
+		ctx.circuitKey: {
+			Amt:          ctx.amtPaid,
+			Expiry:       ctx.expiry,
+			AcceptHeight: ctx.currentHeight,
+		},
+	}
+
+	update := channeldb.InvoiceUpdateDesc{
+		AddHtlcs: newHtlcs,
+	}
+
+	// Don't update invoice state if we are accepting a duplicate payment.
+	// We do accept or settle the HTLC.
+	switch inv.State {
+	case channeldb.ContractAccepted:
+		return &update, resultDuplicateToAccepted, nil
+
+	case channeldb.ContractSettled:
+		return &update, resultDuplicateToSettled, nil
+	}
+
+	// Check to see if we can settle or this is an hold invoice and we need
+	// to wait for the preimage.
+	holdInvoice := inv.Terms.PaymentPreimage == channeldb.UnknownPreimage
+	if holdInvoice {
+		update.State = &channeldb.InvoiceStateUpdateDesc{
+			NewState: channeldb.ContractAccepted,
+		}
+		return &update, resultAccepted, nil
+	}
+
+	update.State = &channeldb.InvoiceStateUpdateDesc{
+		NewState: channeldb.ContractSettled,
+		Preimage: inv.Terms.PaymentPreimage,
+	}
+
+	return &update, resultSettled, nil
+}
diff --git a/record/mpp.go b/record/mpp.go
index b28d1085..38877caf 100644
--- a/record/mpp.go
+++ b/record/mpp.go
@@ -1,6 +1,7 @@
 package record
 
 import (
+	"fmt"
 	"io"
 
 	"github.com/lightningnetwork/lnd/lnwire"
@@ -96,3 +97,8 @@ func (r *MPP) Record() tlv.Record {
 		MPPOnionType, r, size, MPPEncoder, MPPDecoder,
 	)
 }
+
+// String returns a human-readable representation of the mpp payload field.
+func (r *MPP) String() string {
+	return fmt.Sprintf("total=%v, addr=%x", r.totalMsat, r.paymentAddr)
+}