One of the most important questions to consider before you decide to sue anyone is the following: If I win my small claims case, can I collect the judgment? You may be surprised to learn you don't automatically receive the money when you win a judgment. If the defendant doesn't voluntarily pay, you'll have to use additional legal procedures to collect. Unfortunately, it is easy to get so caught up in thinking about suing the person who did you wrong that you forget to think about how you'll collect. This mistake can compound your original loss by wasting your valuable time for the dubious satisfaction of hearing the judge say, "You win."
Collecting from solvent individuals or businesses isn't usually a problem, because most will routinely pay any judgments entered against them. If they don't, there are a number of legal ways you can force them to do so. But unfortunately, a goodly number of people and businesses sued in small claims court are either broke (lawyers say "judgment-proof") or so adept at hiding their assets that collecting your winnings may prove impossible. And if a deadbeat debtor won't pay voluntarily, collecting your judgment can be difficult and require you to spend more money, without knowing if you'll be able to collect enough from the defendant to repay these collection expenses. For example, debtor protection laws prevent you from seizing certain types of property, including the food from the debtor's table, the clothing from the closet, the TV from the living room, or even, in most states, the car from the driveway.
What should these facts mean to you? A significant percentage of people who are not homeless or even "poor" are nevertheless "judgment-proof." You can sue and get judgments against these deadbeat defendants until red cows dance on a pink moon, but you won't be able to collect a dime.
To investigate whether your debtor is a likely deadbeat, start by finding out whether the defendant has a job. If so, that's good news–when someone fails to pay a judgment voluntarily, the easiest way to collect is to garnish the person's wages. But usually you can't garnish a welfare, Social Security, unemployment, pension, or disability check. So if the person's income is from one of these sources, red flags should definitely be flying unless you can locate other nonexempt assets.
Under federal law and in most states, a creditor with a judgment can't take more than 25% of a judgment debtor's net earnings, or the amount by which the debtor's net weekly earnings exceed 30 times the federal minimum wage, whichever is less. (Net earnings are total earnings minus all mandatory deductions for such items as withheld income taxes and unemployment tax.)
The sheriff or marshal's office in your area usually can supply you with your state's rules. If you're a defendant and there's a judgment against you, strategies to cope with wage garnishment are covered in Solve Your Money Troubles, by Robin Leonard and Margaret Reiter (Nolo).
What about other collection sources? Can't a judgment be collected from assets other than wages? Sure. Real estate, bank accounts, stocks and bonds, and motor vehicles are other common collection sources. And if you've sued a business, you can often collect by ordering the sheriff or marshal to take the amount of the judgment right out of the debtor's cash register.
But remember, many types of personal property are legally exempt from attachment. In New York, for example, among a long list of exemptions we find "all stoves kept for use in the judgment debtor's dwelling house" and a "pew occupied by the judgment debtor or the family in a place of public worship."
Most states exempt household goods and appliances necessary for everyday living (such as a stove, refrigerator, dishes, or TV set); sentimental items and family keepsakes (such as photos, jewelry, or works of art); and tools or machinery the debtor uses to make a living (such as a computer, professional library, or power saw). A debtor's retirement account, life insurance, pension, and certain types of savings accounts are also protected. Even more significant in terms of assets, a portion or all of the equity in a debtor's home is exempt.
What does all this boil down to? Simply this. Before you file your small claims court case, make sure that at least one of the following is true:
Beware of bankruptcy. If a person or a business declares a straight bankruptcy (under Chapter 7 of the federal Bankruptcy Act) and lists you as a creditor, your right to recover a small claims court judgment outside the bankruptcy is cut off, along with most other debts. There are, however, exceptions to this general rule, such as if your claim arose because you or your property were injured by the fraudulent or malicious behavior of the defendant. In this situation, your right to collect your judgment should survive the bankruptcy, but you may need to intervene in the bankruptcy proceeding. If you had security for the amount owed you on the judgment, as would typically be the case with a car loan, a mechanic's lien, or a real estate mortgage, you should still be able to recover the property that is the security, but the bankruptcy can cause a delay. For more information, see How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo).
Now let's look at some situations where you are likely to have a problem collecting: