Before going to court, it's wise to send the other party a short, clear letter demanding payment. It may seem too good to be true that a simple letter can result in the other side paying what you ask or agreeing to an acceptable compromise, but demand letters initiate a successful resolution in as many as one third of all potential disputes.

Why You Need a Demand Letter

Most people who know they owe you money expect you won't pursue them, but things often change if you write a firm letter, called a demand letter, laying out the reasons why the other party owes you money and stating that if you fail to get satisfaction you plan to go to small claims court. For the first time, the other party must confront the likelihood that you won't go away but plan to have your day in court. They must face the fact that they will have to expend time and energy to publicly defend their position.

How to Write a Demand Letter

1. Review the history of the dispute. At first this may seem a bit odd -- after all, your opponent knows the story -- but remember: If you end up in court, the letter can usually be presented to the judge, who doesn't know the facts of your dispute.

2. Be polite. You catch more flies with honey than by hitting them over the head with a mallet. Avoid personally attacking your adversary (even one who deserves it). The more disparaging you are, the more you invite the other person to respond in a similarly angry vein. Instead, you want the other person to adopt a business-like analysis:

• What are my risks of losing?
• How much time will a defense take?
• Do I want the dispute to be made public?

With luck, the other party will decide it makes sense to compromise.

3. Ask for a specific resolution. For example, ask for a specific amount of money to be paid by a set date, or for the other person to do something specific, such as fix a botched home repair job.

4. Make it look professional. Use a computer or typewriter to write your demand letter. Keep a copy for you records.

5. Threaten the alternative of court. Conclude by stating that you will file a lawsuit if your demand is not met.

To learn more about demand letters and other methods of settling potential disputes, read Everybody's Guide to Small Claims Court, by Ralph Warner (Nolo).