Hired a graphics artist and never completed his job.

Back in February I was contracted by a publisher to create a game for them and when the contract was signed and completed I hired a company to do graphics work for it. We worked up a verbal agreement about the process and how it will work out and they started working on it. I paid them $1,250 up front to start the process. Everything was going great until a few months later they completely vanished from me. They won't return my calls or online messages. I even gave them a 24 hour notice to reply or they will hear from a lawyer. Still to this day they have my money and refuse to reply. Now because of this I'm out of money, in debt, and maybe getting sued for not completing this contract. I'm in a loss of what to do. This game was suppose to supply my income for a couple of years and now as it stands I'm pretty much screwed.