One of the more difficult aspects associated with the “good bank and bad bank” analogy is that there are so many competing explanations as to what constitutes a “good bank”. One popular analysis has focused on how much banks are really worth in view of the toxic assets that are so complicated to evaluate. In this perspective, “bad banks” are those whose assets are estimated to be worth less than their liabilities and as a result have been referred to as “zombie banks” and “dead banks walking”.

Not surprisingly we have not yet experienced a bank which has openly agreed that their liabilities exceed their assets and therefore they should be considered to be a zombie bank. This would be tantamount to describing themselves as a bankrupt bank. If a bank is truly deserving of the bankrupt status (and there are a number which certainly appear to be in this category), the current banking laws do not permit such a bank to go through the kind of bankruptcy process being considered by General Motors and Chrysler.

Instead the Federal Deposit Insurance Corporation (FDIC) is supposedly required by law to assume the operation of the bankrupt bank until a new management and ownership arrangement can be established. For a number of smaller banks, this has in fact occurred during the past few months. What has been missing so far from this legal bank takeover approach by the FDIC has been the inclusion of larger banks which appear to have problems that are much more serious than the smaller banks which have already been liquidated and transferred to new owners by the FDIC.

The reason that the FDIC has not liquidated larger problematic banks has not been made public. It is certainly possible that the FDIC and key public officials feel that the public failure of a major bank would create a crisis of confidence for all banks regardless of their financial health. An equally strong likelihood is that the FDIC simply does not currently have sufficient assets to cover the failure of a big bank. This viewpoint is supported by the recent announcement that the FDIC is in the process of raising fees paid by banks in order to replenish the FDIC insurance funds.

To realistically protect the future financial health of their own business, small business owners need their own evaluation standards to determine what constitutes either a “good bank” or “bad bank”. Business owners should include an assessment that focuses on results as to which banks can provide the needed help for their specific business circumstances involving working capital financing and commercial loan needs. The banks themselves are not likely to be helpful in providing the needed data to produce a candid evaluation of their financial status, even though such information would go a long way toward establishing a good bank-bad bank distinction.

As noted above, it might be possible that there are several bankrupt banks still functioning normally because they have not rushed to advise the public that they are in serious trouble. While most banks have been publicizing during the past few months that they are making SBA loans and small business loans in a normal fashion, in most cases these banks have actually reduced commercial lending dramatically. Some specialized business lending such as commercial construction financing has been frozen altogether in many areas.

In addition to the critical importance of identifying “good banks”, we have published a related report which describes the delicate issue confronting many business owners who might need to fire their banker. There are “good bankers” and “bad bankers” just as we have noted that there are “good banks” and “bad banks”.

Business finance consulting has emerged as an important tool to help small business owners work their way through a complicated commercial banking maze. One of the common questions asked in the Bernie Madoff fiasco concerns the repeated failure of investment advisors to analyze internal operations prior to placing investor funds with the Ponzi scheme constructed by Madoff over a period of many years.

Our candid final point is that the use of a commercial finance consultant should be at least considered by commercial borrowers in their search for new working capital loans and commercial mortgage financing. Businesses now need to act more aggressively than before in order to protect their own financial interests.

This situation sounds like a case for small claims court. Here’s what you need to do:

1. Letter

Write your friend a letter. Tell him that he has two weeks to pay you back. Tell him you want to resolve his payment to you in a friendly manner, but if you do not receive a check within two weeks, you will see him in small claims court.

We’re hoping that the letter resolves the non-payment problem. If it does not, you’ll have to continue to step two.

2. File a claim

Go to your local small claims court and complete the forms. You can probably download the forms from your county’s small claims website. Submit the forms to the small claims court. The court will schedule a hearing.

3. Service of process

Your friend has become the defendant. He must be served at least 15 days before the hearing date if the defendant lives in San Francisco county. If the defendant does not live in the county, s/he must be served at least 20 days before the hearing date. A capable adult must serve a true copy of the claim. You cannot serve the defendant.

4. Evidence

You next gather all evidence to submit at the hearing. Evidence would include a copy of the cancelled check that you gave your friend and dates and notes of all phone calls that you made to him. You may want to take a photo of his new house.

5. At the hearing

Small claims courts are generally much more informal that other courts. The judge will ask you questions, and then s/he’ll ask your friend, the defendant, questions.

If you have presented the situation with evidence, the judge will probably rule in your favor.

You’ve won your case, and your friend is now going to pay you back, but suppose he doesn’t. Suppose he is a real jerk and has decided that he wants you to have to work just a little harder to get your money back.

6. Collecting a judgment

You have to collect the judgment. The defendant may pay the amount directly to the court. If the defendant does not have the money, the defendant may have to pay installments.

If your friend refuses to pay, you can complete an Application and Order for Appearance and Examination which would require your friend to appear in small claims court to have his income and resources examined.

You could also consider wage garnishment by completing a Writ of Execution. This writ could also levy your friend’s checking or other bank account.

If your friend has a business with a cash register, a sheriff can go to the business for a till tap. The sheriff can take enough money from the cash register to pay the judgment debt. The typical sheriff’s fee for a till tap is $85.00. We hope your friend doesn’t put you in this situation, but if you are ever in this situation, the purpose of small claims courts is to resolve small problems without the expense of an attorney. This is the do it yourself legal remedy.

Disclaimer: This article is not to be considered legal advice. If you need legal advice, seek out a licensed attorney. Remember that small claims courts do not require an attorney. If, however, the losing defendant appeals the small claims court’s decision, the new venue is a superior court. In a superior court, you will need an attorney.