When a company goes out of business, it usually sends up red flags. Financial issues typically arise, and as a result, creditors demand payment. If, as a creditor, you find yourself in this situation, below are some helpful tips to help you collect from the debtor business.
Improve your chances of collecting payment later by making sound business decisions from the start. When the business first contacts you to purchase your services or product, require the owner(s) to sign a personal guaranty that guarantees payment even if the company goes out of business. A personal guarantee is a promise by an individual in the company, typically the owner, to accept responsibility and to agree to personally pay any debt of the business if the business fails to pay. If the company then goes out of business, and either has no assets to pay a creditor, or the assets aren’t worth enough in value to pay the debt owed, then a personal guarantee will come into effect. The personal guarantee will allow the creditor to go after the assets of the individual who guaranteed payment, including, but not limited to, any real property they own, bank accounts, and wages to obtain payment.
Depending upon the type of industry you are in, you may be able to secure a mechanics lien. Contractors, subcontractors, or suppliers whose work improves the real property sometimes use mechanics liens. They can be filed by architects, engineers, surveyors, or interior designers who provide labor and services related to real property. A mechanics lien gives the creditor a legal claim against the real property and is a very effective way of securing payment. However, it does have complex requirements and requires it be filed correctly to ensure a creditor’s interest is secured.
Whenever a corporate entity or LLC ceases doing business, they are required to follow dissolution procedures, which includes marshaling the business assets. Unfortunately, by the time the company dissolves, there are only debts and often no assets (likely why the business probably dissolved). However, it is still important to explore the possibility of there being assets.
Frequently when a debtor goes out of business, the company will file bankruptcy. The filing of a bankruptcy proceeding requires an automatic stay for all collection efforts by any creditors against the debtor. As such, many creditors do not follow through and monitor the bankruptcy proceeding nor file appropriate pleadings to ensure as a creditor; they obtain access to and knowledge of the debtor’s assets. It is my recommendation that you file all necessary papers with the bankruptcy court, notifying the court that the debtor owes you money. This step will ensure that you receive notices from the court.
Additionally, during most bankruptcy proceedings, there will be an opportunity for a creditor to question the debtor regarding the assets. This crucial step in the process enables a creditor to obtain information regarding assets in which the court was unaware. Consulting with an attorney who can represent you as a creditor throughout the debtor’s bankruptcy proceedings can be a valuable expense to incur.
If all else fails, be open to negotiating a deal where the debtor can pay you in installment payments to recoup money owed to you. Often, a debtor will seek a reduction in the amount owed or finance charges and late fees incurred. Although collecting the full amount owed is the most advantageous, there is no advantage to not collecting at all. Obtaining payment, even if not the total amount owed, is more beneficial to a creditor than pursuing a judgment against a business that has no assets.
About Andalman & Flynn Collections: For decades, businesses and professionals have been turning to the experienced collections attorneys at Andalman & Flynn for their debt recovery needs. A licensed collections agency, their experienced team successfully navigates the complex laws surrounding debt collection practices. The firm combines cutting-edge technology with savvy, effective debt resolution methods that result in high success rates and fast recovery times. For more information, please visit www.andalmanflynncollections.com.