Say you have the best client in the world (perhaps your own brother) and you do $5K worth of work. A few years later the company is acquired, gets all new management, and now your $5K software is supporting a $500M/year business. Some noob in IT blindly updates all the servers without testing compatibility and your software breaks.
A week later you get back from your totally offline trek through Nepal to find angry voicemails and emails from the organization now depending on your software, and you're now facing a $10M lawsuit from the new management for losses incurred due to your software breaking.
Long story short, your liability isn't limited to the relatively small amount you were paid for the work. And because you didn't have a contract, you could be held personally liable and risk losing your house, retirement savings, etc.