Sue the Client in Superior Court

If the client owes you substantially more than the small claims court limit for your state, you may wish to sue in a formal state trial court, usually called the municipal court or superior court. Debt collection cases are usually very simple, so you can often handle them yourself or hire a lawyer for the limited purpose of giving you advice on legal points or helping with strategy. In truth, few collection cases ever go to trial. Usually, the defendant either agrees to settle before trial or fails to show up in court (which gives you a default judgment for the amount owed).

Take the Client to Arbitration

Before you sue the client in court, be sure to look at your client agreement to see whether it contains an arbitration clause. This provision -- usually entitled "arbitration" -- requires you to submit any disputes with the client to arbitration, rather than going to court.

If your contract has such a clause, you'll be barred from suing the client in small claims court or any other court. This is not necessarily a bad thing. Arbitration is similar to small claims court in that it's intended to be speedy, inexpensive, and informal. The main difference is that an arbitrator, not a judge, rules on the case. An arbitrator's judgment can be entered with a court and enforced just like a regular court judgment.

When to Give Up

If the client has gone out of business or vanished from the face of the earth, or you know that he or she will likely never be able to pay you anything (either now or in the future), your best option may be to write off the debt. As the old sayings go, you can't get blood out of a turnip -- and you shouldn't throw good money after bad.

Unfortunately, if your business provides only services, you can't tax a tax write-off for the bad debt. The rationale behind this rule is that it would be too easy for independent contractors to inflate bills and claim large deductions for bad debts that were never really incurred. (If any part of the bad debt is for goods however, you can deduct the cost of goods that the client received but never paid for.