How to Collect Debt in a Business Dispute Without Spending Big Bucks on Lawyers

Would you consider $10,000 a lot of money?  Most people do, but it also depends on your perspective.

A few years ago, a disagreement between two small businesses where $10,000 was at stake may not have gone anywhere. With profits up and business booming, businesses didn’t have the time and didn’t want to jeopardize existing business relationships to file an expensive lawsuit over the relatively “small” sum of $10,000.

Today, with the economy in its third year of recession or extremely slow growth, a lot of small businesses are not going to give up on $10,000 without a fight.

As a result, disputes between small businesses over relatively smaller sums have gone up as the economy has gone down. More of these disputes have ended up in court.

What do I mean by “smaller sums”?  It depends on where you are in the country.

In a medium-sized city where lawyers are *relatively* affordable, and your business is prospering, then $10,000 might be considered a smaller sum.  If you’re in a large city where attorneys may charge over $500per hour, then a smaller sum could be $50,000.

That is, it might not be worth the time, energy, and money required for a business to chase $50,000 if they have no guarantee of collecting.  They could easily spend as much as $25,000 or $30,000 in the process.

The problem with expensive legal fees is it makes disputes over the smaller sums nearly impossible to pursue. The amount at issue is too little for the parties to come to an agreement, but the amount is not large enough to justify spending a couple of hundred dollars per hour to pay a lawyer to file a lawsuit.

As a result, small business owners are left to their own devices.

If you have a business that is at odds with another business or individual over anywhere between $5,000 and $50,000 — again, depending on where you’re located — you may be stuck with this predicament.

Does it make sense to hire a lawyer to file a lawsuit, knowing that there’s a chance you will end up empty handed with additional legal bills, or is the amount at issue not large enough that it’s worth spending the extra money, time and energy pursuing the disputed claim in court?

And are there any other options?

It turns out there are other options. Let’s run through them.

OPTION #1: File a Small Claims Lawsuit On Your Own

The first option is to go after the debt yourself by filing a small claims suit. Thousands of people do it every year. The advantages are you save money by not hiring a lawyer and you get streamlined, quicker access to justice. The disadvantage is claims are limited to $7,500 in California and the small claims court — which often hears dozens of cases per day — may not devote adequate time to evaluating your claim.

Also, you cannot appeal a small claims court judgment if you were the plaintiff and you lost.

It turns out a lot can go wrong when you represent yourself, including your Defendant could file a cross-claim against you and you could end up with a judgment up to $7,500 against you.  Although I often think it’s still worth pursuing in spite of the risks, you should just be aware of the risks of representing yourself in court.

Although lawyers can’t appear in small claims court, you could hire a lawyer for a limited representation to advise and strategize with you before you show up for your small claims trial.

I would say if the debt is between $7,500 and $15,000, you may want to think about just demanding $7,500 so that you can fit under the jurisdictional limits of small claims court, save yourself the cost of hiring a lawyer and get a decision far quicker.

OPTION #2: Send a Demand Letter on Law Firm Stationery

If the previous option won’t work, then you might want to try hiring a lawyer for the express purpose of sending a threatening demand letter.  Your lawyer would draft up a demand letter complete with backup evidence such as contracts, bills, emails, etc.  He or she sends off the demand letter and then you wait.

You can also try the less expensive option of having your lawyer pick up the phone and call the person, but I have rarely seen that work.

OPTION #3: Sell the Debt to a Collection Agency

If your debt is significant enough, you may be able to sell it off to a collection agency. Although you would only get a small amount for selling the right to pursue the debt, at least you would have some money in your pocket, compared to pursuing the debt yourself, in which case there are no guarantees.

OPTION #4: See If You Can Hire An Attorney on Contingency, Flat Fee, or “Capped” Fee

Finally, you can see if you can find an attorney who will be willing to take the representation on a non-hourly, alternative fee arrangement. The most common of these types of arrangements are contingency, flat fee, or “capped” fee, or some hybrid of the three.

According to the laws in most countries, including laws of the trust deed in Scotland, if the amount of the debt is significant enough, and the attorney thinks there is a good chance of recovering something, then you may have a good chance with this approach.

Of course, most lawyers won’t take on these types of arrangements unless they’re (A) desperate, or (B) fairly certain they have a good chance of recovering something.  Lawyers, like most people, don’t like working for free. So they’re probably only going to take your case if they think it has merit and there’s a good chance of recovering (i.e. if the Defendant owns property or has a stable job).

One advantage to this approach is it limits your costs and your lawyer may be more invested because it is in their best interests to recovery some amount, compared to an hourly-fee lawyer who gets paid whether there is success or not.

One disadvantage is you may give up a big chunk of the potential recovery (i.e. 33-40% in case of contingency) and you may have trouble locating a competent lawyer who is willing to take on the representation using an alternative fee arrangement.

Unfortunately, there is no magic wand that we can wave to make your money come back. However, with a little luck and some creativity, you may have a decent chance of seeing some of those funds again.

Do you have any better suggestions for techniques to get money back from a business dispute?  Leave suggestions and stories in the comments below.

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John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at             (415) 250-8131       or [email protected]


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Photo credit: Flickr/Magharebia



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