Frontier -- Special Report
Staking Small Claims
How to collect from deadbeats without making a federal case of it
Steve Chatot considers himself a winner in small claims court despite having never been in front of a judge. As the credit manager for Knapp Supply Co., a wholesaler of plumbing fixtures in Muncie, Ind., Chatot walked away happy from a half-dozen collection claims in the past year. How did he do it? The cases always settle, often during a pretrial conference with a court clerk. "Going to small claims court doesn't shut down the lines of communication," he says. Far from it--there's nothing like receiving a summons in the mail to make recalcitrant customers return your phone calls. As for cost-effectiveness, Chatot estimates it has taken no more than an hour per account to recover amounts up to the jurisdictional limits of $1,500--an impressive return on investment in anybody's book.
Small claims courts have an image problem. They aren't just for folks battling over rent deposits or out-of-focus wedding photos anymore. Over the past five years, procedures in most courts have been streamlined, while the amount of potential damages has risen. As a result, these low-level venues are attractive tools for recovering bad debt. And rocket science it isn't: Most suits are initiated simply by filing a standard form in court and serving the defendant via registered mail. On the horizon is online filing, already available to small-claims litigants in Marion County, Ind., and Pima County, Ariz. In this customer-friendly court, you'll often find staff attorneys to show litigants the ropes and mediators to give them one last chance to work things out.Now, try to collect. What's it worth? Most states cap damages in small claims court at $3,000 to $5,000, says James C. Turner, executive director of HALT, a Washington-based advocacy group whose acronym stands for Help Abolish Legal Tyranny. An exception is Tennessee, where the ceiling ranges from $15,000 in Nashville to $25,000 in Memphis. (The reason, says Warner Hassell, General Sessions Court administrator for Nashville County, is simple: Keeping cases in small claims court means the state can avoid creating new district-court judgeships.)
Other rules also vary widely. Depending on the jurisdiction, you might be permitted to have an attorney present, to sue to get an injunction, or to appeal the verdict. Some states insist on mediation before a trial date, some don't. Business owners should be aware that some states require corporations to be represented by counsel, whose hefty fees might top the amount at stake. (To find your state's procedures, visit: consumer.findlaw.com/lawyers/self/small.html.)
Finally, don't forget that winning a judgment isn't the same as collecting on it. If you're lucky, your state allows judges to order payment directly to the court under the threat of contempt. In most places, however, you're on your own. And if a polite request fails, you'll need to launch what is essentially a second lawsuit to put a lien on your opponent's accounts or property, or to garnish wages. If you want to do it yourself, be prepared to spend lots of time learning how to locate assets and follow court procedures. This is a good deal trickier than the suit itself, so it's usually wise to use a collections specialist. While they take 30% to 50% of the return, they are more likely to recover assets and do it more quickly. Some, such as Continental Recovery Services of Simi Valley, Calif., conduct asset searches of prospective defendants before clients even file a suit. "Why throw good money after bad?" says Marketing Vice-President Phillip Terry. For a 30% cut of the amount recovered, the company will start lien proceedings, serving the defendant and filing the necessary court papers. With a successful recovery rate on judgments of 60% to 70%, it beats letting deadbeats off the hook. Staking a small claim is still better than no claim at all.
For more tips on how you can win in small claims court, click Online Extras at frontier.businessweek.comBy Stephanie B. GoldbergReturn to top