Small Business and Small Claims Judgments: Look Before You Leap

Posted by Marilyn Miller on March 26, 2014  /   Posted in Uncategorized

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I have a client who sues all their accounts that are over 180 days past due. They obtain small claims judgments and after a year, they send me a huge pile of judgments that are uncollected. Every year, 70% of the judgments are uncollectible. Why? Some companies are out of business, other companies are named incorrectly, and still others have no assets to attach.

Every case is not suited for small claims court, and even the ones that are have to be carefully selected and researched. 

While most states have designed the small claims process to serve the needs of small businesses owners and are therefore, relatively user friendly, there are many potential problems and pitfalls. Here are some factors to consider before filing a small claims action: 

  • Enforcement – The Court does not collect your money for you. The Court will provide you with a judgment that gives you the right to attach an asset (home, bank account, wages), but the work of collecting the money, including identifying and attaching an asset is on you. 
  • Viability – What assets does your customer have? Remember, the assets must be in their name. Often, small claims judgment liens are placed against real estate. The good news is that the lien must be cleared before the real estate is refinanced or sold. The bad news is that you have no way of knowing (unless you research beforehand) how many liens are in front of you and what if any, equity exists to pay you. 
  • Economics – Many small businesses owners believe it is less expensive to file a small claims suit than to hire an attorney or collection agency. Each case is different, but costs must be considered, not only the cost of filing suit, but possible costs of marshall service, costs of obtaining the executions for bank account and/or wages. We recently saw a Connecticut case where the costs were over 250 for a 1,000 case. Court costs can usually be recovered, but it could take some time to do so. And while considering costs, how about the cost of your time NOT doing your own job when you have to take the claims to court? 
  • Accuracy – Are you suing the right party? If you are suing a business, be careful to check the correct corporate listing for the company, and also, be sure which assets are in the name of the business versus personally owned. If you have a contract with a personal guarantee, you can due both the company and the principals. If you are suing a consumer, make certain you have the right parties – do you live in a state where the spouse is liable? Also, ALWAYS take care to get the right address – without proper service, you will be unable to proceed.  

In summary, the small claims process is a tool that works for some cases, but not for all cases. The key is knowing when to use the Courts and when to look elsewhere to get your money.

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