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Lawsuits should be a last, not a first, resort. In addition to being time-consuming and emotionally draining, lawsuits–even the small claims variety–tend to polarize disagreements into win-all or lose-all propositions where compromise is difficult. It's not hard to understand how this happens. Most of us, after all, are terrified of making fools of ourselves in front of strangers. When forced to defend our actions in a public forum, we tend to adopt a self-righteous view of our own conduct and to attribute the worst motives to our opponents. Many of us are willing to admit in private that we have been a bit of a fool–especially if the other person does, too–but in public, we tend to stonewall, even when it would be to our advantage to appear a little more fallible.
In most states, you are required to ask for the money owed you before filing a small claims lawsuit. For example, in California the form you fill out to start a small claims lawsuit states, "You must ask the Defendant (in person, in writing, or by phone) to pay you before you sue. Have you done this? If no, explain why not."
Although I am a strong advocate of resolving disputes in small claims court, I have nevertheless witnessed many otherwise sensible people litigate cases that never should have been filed in the first place. In some instances, the amount of money was too small to bother with. In others, the problem should have been talked out over the back fence. And there were some situations in which the practical importance of maintaining civil personal or business relationships between the parties made it silly to go to court over a few hundred or even thousands of dollars.
Let me make this last point in a slightly different way: It is almost always wise to first look for a noncourt solution when the other party is someone you'll have to deal with in the future. Typically, this would include a neighbor, a former friend, or a relative. Similarly, a business owner will almost always benefit by working out a compromise settlement with another established local business, a long-term customer, or a client. For example, an orthodontist who depends on referrals for most new customers should think twice before suing a patient who has refused to pay a bill in a situation where the patient is genuinely upset (whether rightly or wrongly) about the services received. Even if the orthodontist wins in court, the patient is likely to become a vocal enemy–one who may literally bad-mouth the orthodontist from one end of town to the other and in the end cost him or her a lot more than what was won in court.