Many small claims cases involve bad debts–a claim that the defendant owes the plaintiff money. Usually this means a bill for goods or services hasn't been paid, but it also can involve failure to pay a promissory note (for example, a loan from a friend or relative) or even a civil fine for something as simple as the failure to return a library book. The plaintiff wins the vast majority of these cases, often because the defendant defaults. This illustrates how effective small claims court can be as part of any business's collection strategy. Individuals also use small claims court to sue over goods or services that are shoddy, not as promised or ordered, or not delivered at all.
Even bad checks for small amounts may be worth pursuing. A rubber check may be worth three times its face value. Every merchant is stuck with a bad check now and then. In many states, special laws allow a person receiving a bad check to obtain a judgment for a significant amount of money in damages in addition to the amount of the check, sometimes up to three times the amount of the check.
But paradoxically, small claims court can also work well for a defendant who puts on a spirited defense because the person believes he or she owes no money or the plaintiff is asking for too much. In large part this is because, unlike formal court, in small claims, defendants don't need to file complicated paperwork or jump through other legal hoops to present their side of the story. Indeed, all a defendant has to do is show up on the appointed day and make a convincing, well-documented presentation.
Some professionals, like doctors, dentists, and lawyers, don't use small claims court to collect unpaid bills because they think it takes too much time. Businesspeople who don't use small claims court as part of a self-help debt collection strategy must normally either write off the loss or turn the bill over to a collection agency. But small claims court actions can often be handled with very little time and expense once you get the hang of them. And in many states, businesses can delegate the job of actually appearing in court.
Unincorporated businesses can often send a representative to small claims court. Oftentimes, a bookkeeper, financial manager, or other employee of a sole proprietorship or partnership can appear and present a case in small claims court if the case can be proved by presenting a business record (showing that a bill hasn't been paid, for example), and if there is no other issue of fact involved in the case. And, in many states, a corporation or limited liability company has the right to send any authorized employee, officer, or director, and a partnership may send a partner, to court.
Who Should Appear in Court?
Small claims courts vary from state to state in terms of who can sue to collect unpaid bills. Some states:
- allow bill collectors (called "assignees") to use small claims court
- ban bill collectors, but let lawyers carry out much the same task by representing multiple creditors, or
- ban both bill collectors and lawyers, only allowing businesses to sue on their own behalf.
Even among the states where businesses can't hire third parties but must represent themselves to sue on bad debt claims, there are important differences. For example, a few states entirely prohibit corporations from suing in small claims court, while others make it difficult for unincorporated businesses to send anyone but an owner or partner to court. However, most states allow corporations to sue and make it reasonably easy for both incorporated and unincorporated businesses to designate a bookkeeper or other employee to handle court appearances.
After first checking the summary of rules on your state's website, contact your small claims court clerk and find out exactly what rules govern bill collection activities in your state. If you are a business, talk to other businesspeople (or business associations, such as the chamber of commerce) to learn practical strategies to cope with these rules. Also, if you are in a state where bill collectors or lawyers do small claims collection work, you will want to find out how much they charge and how efficient they are and then compare this information to the time and energy it would take for you to do it yourself. Because bill collectors and lawyers typically charge from 20%-50% of any money they collect, you may conclude that you want to do this work yourself.
In many states, a business owner does not have to personally appear in court but can send an employee. Where money is owed, a bookkeeper or financial manager is normally a good choice, because the person can testify that a valid contract existed and the defendant has not paid the promised amount. However, if the defendant shows up and defends on the basis that the goods or services were defective, delivered late, or otherwise not acceptable, the bookkeeper is likely to be at a serious disadvantage; he or she probably has no firsthand knowledge of anything except that the check was not in the mail. For example, if you own a graphics business and are suing on an unpaid bill in a situation where you expect the defendant to show up in court and falsely claim you did lousy work, you will need to have someone in court who knows the details of the particular job. Typically, this should be the employee who dealt with the customer and did the work.