It’s an unfortunate reality that not every loan or business deal will always work out as originally planned. At the end of 2021, banks in the United States reported an estimated $5 billion dollars worth of personal loans on their collective balance sheet were past due by 60 days or more.
Yet unlike banks, most individuals cannot rely on a collections agency to send demand letters or take other laborious steps to recover bad debt. For many, even just the thought of taking someone to court to recover a debt owed to them can be intimidating (or at minimum, it can seem like a major hassle 😩).
Luckily, the small claims court system is designed to be a low-cost solution for settling money disputes without requiring an expensive lawyer. The fee to file your case in small claims court for a $500 dispute may be as low as just $5 depending on where you live. Even better, your fees can get refunded if your settlement case prevails.
That said, navigating the legal process to collect the money you’re owed requires preparation, organization, and patience. So here are the best tips and tricks for responsibly dealing with someone who’s unable or unwilling to repay an outstanding debt.
Disclaimer: The tips below apply to individuals seeking advice on how to get money back from someone who has agreed to borrow money from them 👥.
1. Make sure the terms of your loan are documented in a written agreement
While verbal or “handshake” agreements may still be accepted as legal contracts in some courts, a defaulting borrower could argue that your loan agreement was vague or unclear, and is therefore invalid 🤷🏽♂️
For that reason, documenting the terms of your loan in a contract or a promissory note is the best way to make sure you’ll be able to recover funds if the agreement doesn’t go as planned. Since it involves lending money, you might also want to consider getting your written agreement notarized.
However, if you weren’t able to get your agreement in writing before lending out the funds, don’t worry — you still have a course of action for getting your money back.
2. Make a good faith effort to resolve the issue outside of the court system
The laws for resolving personal debts vary greatly across regions, but being able to show that your prior collection efforts outside the court system have failed is almost universally accepted as a best practice across all courts. Before visiting the court clerk or calling an attorney, it may be wise to ask yourself the following questions:
- Have I made multiple requests for this person to pay me back, and do I have proof of it?
- Does this individual have a lawyer assisting them with this dispute? If so, have I tried to contact them?
- Have I made a reasonable attempt to resolve the issue before taking more severe legal action, such as offering a payment plan or a Debt Settlement Agreement?
To increase your chances of winning your case or obtaining a default judgment, it’s wise to have your answers to these questions ready before filing your claim.
3. Determine the jurisdiction in which you will be filing your lawsuit
Depending on your country’s legal system, you usually have the following options to consider when trying to identify which state, territory, or district to file your claim in:
- Where the dispute took place — If you lent someone money while on vacation in Miami, then you likely have the right to have your case heard in a Small Claims Court in Miami-Dade County.
- Where the person who owes you money lives — In most cases, you will also have the option to file your claim in the jurisdiction where he or she resides.
- Where the disputed property is located — If you know the money you’re owed is being held in a particular place (such as a safety deposit box in a bank), you may want to consider filing your claim in the same jurisdiction where it’s being held.
4. Research the Small Claims Court laws in your jurisdiction
In general, Small Claims Courts hear civil cases for smaller amounts of money (i.e. usually no more than $25,000) and do not require you to have a lawyer.
That said, every jurisdiction has its own unique laws and procedures that guide how the process works for its residents. Be sure to read up on your state’s Small Claims Court system and check the Civil Statute of Limitations to be aware of any specific rules that apply where you’ll be bringing your lawsuit.
5. Determine whether or not you can and should get representation from a lawyer
Some courts will allow you to be represented by a lawyer, while others may only allow you to represent yourself.
Even if you’re confident in your own ability to represent yourself, it is always advisable to seek the advice of a trained legal professional to support you with your small claims case when possible.
6. Gather your evidence and file your claim
Some courts will allow you to file your claim online, in addition to mailing in a paper form. You can find your jurisdiction’s website and the details of the claims submission process by consulting the list published by the National Center for State Courts.
Prepare an organized file containing all facts and documents relating to your case including contracts, payment receipts, emails, letters, past-due notices, photographs, and other relevant information that may help you prove your case in court.
Once your claim has been filed and served to the defendant, you’ll be notified of the date when it’s time to have your case heard!
The bottom line: Small claims court can save you money, but probably not time
Let’s be real: no matter how friendly or organized you are, recovering a debt from someone that owes you money is not going to be the smoothest process in the world.
Nonetheless, a lender that succeeds in small claims court has the potential to get more money back on a defaulted loan compared to someone who just writes it off as a bad debt expense when filing his or her taxes.
For the best chances of getting your money back, consider using Pigeon to ensure your loan contract and any payments, extensions, or payment terms are clearly documented and organized throughout the lifetime of your loan.
Even if you’ve already provided help to a friend or family member, you can still get these benefits by tracking your existing loan on Pigeon with a backdated agreement for you and your borrower to sign and manage until all debts are repaid 🙌
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