The small claims court system in the United States was set up as a way to give small business owners and lay (non-attorney) people a voice in the court system, an affordable means to obtain relief and/or recover money owed to them.
Generally the small claims system is designed to allow small business owners to take their own claims to court and save the expense of hiring an attorney. Some small business owners prefer to use small claims court to hiring a collection agency. The courts can be an effective way to recover bad debt, but it is the not the best approach for every business or for every debt. Here are some points to consider:
- Small claims courts award a judgment, but they do not collect the money. The owner of the judgment has to collect the money, or hire someone to do it. If a judgment remains unpaid, it gives its owner the right to attach assets such as a home, job or a bank account. However, if the judgment debtor has no assets in their name, there may be nothing to attach, and the judgment could be worthless.
- Small claims courts limit the maximum amount of the claim. Limits vary by state, but are generally between 3,000 to 7,000. Larger claims would be referred to a larger court, and attorney representation would be required.
- Small claims fees vary from state to state. It is important to know in advance what kinds of fees will be involved, in order to make a decide is a court action is worth the expense. For example, if the filing fee is $100 and your debt is $350, is it worth the effort? Filing fees normally get added on to the judgment and can be recovered, but if you have multiple files, fees can get costly.
- Small claims hearings can last an hour, or take the entire day. Do you have the time to spend in court, away from your business?
- It is essential to name the correct party (ies) in a lawsuit. Do your research. If you are suing a business, and have a personal guarantee against the owner, you may be able to sue the owner as well.
- It also important to make sure you have the correct mailing address for the party you wish to sue. If you cannot serve (ie, notify) the party you are suing, you cannot obtain a valid judgment.
- Each state has different requirements and processes for filing a suit. Call the court clerk and ask for guidelines. Clerks cannot provide legal advice, but they can let you know what information is required.
- Post judgment collection can be frustrating and expensive. You may have incur additional fees or attend additional hearings.
Here is a good example of a debt that may work well in small claims court: Customer owes 3,000 for computer repair at his home. Customer signed work order and has not disputed work, but has failed to pay the bill. Customer has a full time job and is believed to make a good salary. Customer does not have any other judgments against him, and owes only a small amount ofother bad debt.
Why? Customer is not drowning in debt but for some reason has let this bill become delinquent. He may not want to see his credit rating tarnished with a judgment. If he does not pay the judgment, there is an asset (job) to attach.
Here is an example of a debt that may not work well in small claims court: Tenant evicted from apartment and owes 5,000 in back rent. Tenant got behind on rent when he lost his job and is still unemployed. He already has two medical judgments against him, and a massive amount of delinquent credit card debt.
Why not? There is not asset to attach at present. Best to attempt to get this person on a payment plan. If he fails to make payments, he may be a good candidate once he is employed again.
In summary, the small claims system can be a great tool, but is not for every company or every debt owed to your company. Are the costs of the fees and your time worth the money you will save using an attorney or collection agency? Only you can decide!
Do you have experience with the small claims court? We would love to hear about it.
Do you want more tips to reduce bad debt in your business? We have them!