So you have deadbeat customers or clients who owe you money. You've made repeated demands for payment, threatened to charge interest on the overdue debt and personally appealed to your debtors' sense of honor and fair play. Nothing has worked. They haven't paid a cent. Like they say on television, it's time to . . . take them to court!
In most cases, it isn't worthwhile to bring a lawsuit in state or federal court to collect a small amount of money (considered less than $5,000 in many states). Your lawyer alone will charge an upfront retainer of $5,000 to $10,000 to take on a new case (so-called contingency fees, based on a percentage of the judgment you win, are usually not charged in commercial or breach-of-contract cases). And then there are the court costs and the time you lose attending depositions, hearings and so forth. However, every state has a system of small claims courts you can use to collect judgments for small amounts of money ... if you have the nerve.
Make no mistake--when you bring a suit in small claims court, you do most of the work yourself, and pleading your own case before a real-life judge can be one of the scariest events of your life, even if you know you are 100 percent in the right. Yet sooner or later, if you run your own business, you'll get into a situation where you have to bring an action in small claims court to collect an overdue debt (or, God forbid, defend yourself against someone who thinks you owe them money).
Here, then, is a quick guide to surviving a small claims court proceeding.
- Get the Pamphlet. The bar association in just about every state publishes a short guidebook, in pamphlet form, that takes you step by step through the small claims court process in that state. This pamphlet is usually available free of charge or for a small shipping fee. To find the address and phone number of your state bar association, type "state bar associations" into your favorite Internet search engine or go to www.findlaw.com/06associations/state.html, a Web page that links to the home pages of virtually every state bar association nationwide. Once you reach your state bar association, ask for their "publications department."
What if your delinquent debtor is located in another state? Let's say your business is in New York and your debtor is in California. You bring an action in small claims court in New York, and deliver a summons and complaint to the California debtor. The court date comes around, and (surprise!) the debtor fails to show, so you get a judgment in your favor (you won't get this far in many states, where the small claims court will throw your case out because it "lacks jurisdiction" over the defendant). Sad to say, the small claims courts of most states are not legally bound to honor judgments entered by small claims courts in other states, especially if they are "default judgments," judgments rendered in favor of one party simply because the other party failed to show up in court. So, in the above example, you'd have to bring an action in the small claims courts of California, and hope the judge out there feels so sorry for you that you're awarded your travel, lodging and other out-of-pocket expenses on top of whatever the California debtor owes you. If the amount involved is very small, it probably is better to write off the debt and chalk one up to experience.
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.