“Out here a man settles his own problems”–Tom Doniphon from The Man Who Shot Liberty Valance.

While it may be true that the civil court dockets have seen a increase in activity on account of the recession it remains the case that for many disputes the courts are not being utilized to the degree intended by the legislature. Whereas the judges bemoan the “clogging” of the state court calendars the “small claims” calendars are many times underutilized by small business as far too many a small business simply writes off debt without attempting to collect through the courts.

In many instances if the claim is under $10,000 the business makes the sound economic decision that it makes little sense to pay a lawyer thousands of dollars simply to just to get the chance to collect the money that is already owed to it. And so many a small businesses turns their over 120 day aged receivables list to a collection agency where the small business will only have to pay if, and when, any money is ever collected. The problem with this scenario is that while any one $10,000 claim may not bankrupt a small business enough thousand dollar bad debt accounts strung together over a couple of year period will retard the growth of the company by lessening cash flow. While collection agencies are an option (although the statistics clearly show that collection agencies at best collect on 25% of the bad debt accounts) they are not always the best option. Collection agencies control the process. There is little, if any, involvement, by the small business. Granted, that is one of the benefits to the turning over collectables to a collection agency. But the control of the case that one would have with hiring an attorney is all but gone once the cases is assigned to the agency.

Instead of handing over its collectables to a third-party and/or racking up attorney’ fees small business have the option of settling the problems themselves in small claims courts. This is an option, as I say above, is too often ignored. Small claims courts are the perfect venue for small business. No attorney is required and no experience is needed. While the opposing party in most jurisdictions does have the right to have an attorney, it has been my experience that most judges give plenty of leeway to pro se litigants while holding the attorneys in small claims courts to the precise letter of the law.

There is still yet another reason why small business should avail themselves of small claims courts and that is that doing so promotes the macro-economic interests of our economy. To not settle the problem and simply turn it over to a collection agency in the off chance that it gets collected actually disrupts the economy.
This disruption occurs in the same way that a crime disrupts the free market system. Whereas, if one party to a business transaction can breach a duty or obligation to which it had erstwhile agreed, and do so without any repercussions, then not only will the “victim” be adversely affected, so to will the entire market. The disruption will evidence itself in an increase in the cost of goods. But if one firm can cause an unrecoverable loss, then a situation exists that is substantively similar to the increase in prices that is the result of shoplifting. Whereas the retailer can recoup its cost only by increasing the price of its goods, the small business can recoup the cost of being unable to fight certain legal battles only by increasing its costs.

A business that has small profits cannot afford to have its pricing structure adversely affected to too great a degree. Assuming that the price of the product was appropriately set by the market, a distortion of the market price (increase) may lead to fewer sales, which if persistent will lead to a cessation of business.
Though the ability to distort the market is present in all forms of dispute, it has its greatest impact on those transactions in which the amount of dispute is relatively small compared to the amount of attorney fees to be incurred. Consequently, many times the small company or individual will recognize that since the cost to litigate will be equal to or less than the amount at stake, it will simply “write-off” the loss.

Make no mistake, filing in small claims court does not guarantee one success. Nor does it guarantee that if a favorable judgment is received that the judgment will be collectable. What it does do is allow the small business the ability to control the process and to receive almost 100% on the dollar on everything that is collected. For cases that exceed the dollar amount limits for small claims courts then hiring an attorney is almost always the best choice. But for debts that are under $10,000 and that would otherwise have been written-off and/or turned over to a collection agency, small claims courts are a viable option.