Is Small Claims Court a Good Option?
Non-paying clients are unfortunate, but they are becoming increasingly common. The good news is that businesses like yours have a wide range of solutions at hand to deal with these situations, including taking clients who fail to pay to small claims court. However, is litigation really a good idea?
The Reality of Small Claims Court
The truth is that taking a debtor to small claims court might be a very wise decision. However, it should never be your first option. Instead, follow these tips:
- Compromise – Before doing anything else, try to work out a compromise with the debtor, even if this requires offering a slight discount in exchange for them paying their debt.
- Is It Collectable? – Make sure that the debt in question can actually be collected.
- Send a Final Demand Letter – If you haven’t already, send a final demand letter. Most courts recommend this, and some require it for your suit to move forward.
- Serve a Debtor’s Exam Order – Inform your client that if they do not pay, you will be forced to serve a debtor’s exam order, which will expose their business and personal assets to the court’s scrutiny, including tax returns, IRAs, vehicles, and more. Follow that up with a phone call. (click this link for sample letter template and Guide:
https://stevensricci.com/collection-letters/debtors-exam-letter/)
You might find that your debtor is more than happy to pay what they owe rather than go to small claims court, particularly if their assets will be scrutinized. However, that’s not always the case, so be prepared for at least a small number of these clients to insist on going to litigation.
Defining Your Small Claims Court Strategy
You might want to take your debtor to small claims court for any number of reasons, including revenge, saving money in the process of pursuit if the payout is small, and playing the long game.
If you want your money but don’t want to spend a dollar chasing a nickel, or you’re playing the long game, your next step should be ensuring that you have identified and confirmed the post-judgment asset you’re going to attach. This could be the debtor’s bank account, or it could be real property. In the case of a bank account, make sure the account is still active before moving forward.
You also need to ensure that your lawsuit is within the small claims court limit on time. Sometimes, it’s too late to sue because you’ve exceeded the state’s statute of limitations. You will also need to identify the specific court for your lawsuit.
If You Go to Small Claims Court
If you decide that the cost of small claims court is worth it, you must be prepared for several potential outcomes. First, if you are in the right and your debtor knows it, they may not show up for the hearing, which results in a default judgment awarded to you. If they do show up, you will either win or lose the judgment based on the merits of your case.
If you win, it’s worth sending the debtor a judgment payment demand, along with a note that any unpaid judgment will stay on their credit report for seven to 10 years. If that does not work, you will usually need to move on to the formal collections process.
In many cases, rightfully awarded judgments go uncollected. This might be for any number of reasons, including the wrong strategy being used, the debtor filing for bankruptcy, or even the suit being filed for the wrong reason.
If you’re contemplating small claims court or fighting to collect a judgment, we can help. Contact us today to discuss your options and learn how our services can turn the situation around.