Can Debt Collectors Come After a Company That’s Dissolved?

When a corporation ceases operations or collapses, lots of business owners think that their liabilities are gone as well. However, as a matter of fact, debt does not just disappear when the business shuts down. The debt collectors can still seek payments, based on the category of a company, the nature of the debts and the person that guaranteed the debt. Can Debt Collectors Come After a Company That’s Dissolved? This is a complication that we will discuss.

Understanding What Happens When a Company Is Dissolved

Liquidating a business is an official process of shutting a business. The dissolution of the business leads to the organization being no longer active and is not able to carry out any trading activity and, as such, has to clear all the outstanding debts and obligations to undergo dissolution.

Nevertheless, this last process is overlooked by most of the owners or they end up liquidating their companies with some debts outstanding. To trouble comes at that point– since, when compounded with dissolution, the debt is not necessarily wiped out.

When you close down your business and still have some business debts, the debts do not disappear. The lenders and debt collectors will still have legal recourse particularly in situations where assets were not effectively sold off or where the owner personally owed the debts.

The Value of Business Structure in the Debt Responsibility

The nature of the business that you owned is a key factor that will make or break the possibility of collectors still being able to come after you or your company.

Sole Proprietorship

Under the sole proprietorship, the owner and the business are not legally separate. It is an indication that all debts are personal to the owner. The collectors can sue the owner even after the business is closed or dissolved. They have a chance to collect the debt using personal property like a bank account, vehicle, or property.

Partnership

In partnership, individual partners can be held personally responsible towards the debts of the firm. These obligations cannot be destroyed by the dissolution of the partnership. Creditors are allowed to proceed with seeking outstanding sum against any partner.

Limited Liability Company (LLP)

The protection of LLC is partial. When the company is dissolved in a proper manner and the debts resolved in the liquidation process, the collectors will usually have no choice but to attack the members personally. Nevertheless, the owners are still liable in case they signed personal guarantees or did not properly dissolve them.

Corporation

There are corporations that are distinct entities. When the corporation is dissolved in a lawful manner, and the debts are not paid, then the collectors may only place a claim on the remaining assets of the corporation – not on the shareholders/directors themselves. The exception is in the situation when it is due to fraud, mismanagement or personal guarantee.

Actions that Debt Collectors Can Lawfully Take following Dissolution

When a company is dissolved, debt collectors have certain limits, still, they may pursue it under some conditions. Here are common scenarios:

In case the debt was secured by the hand of the individual:
A large number of business loans, credit cards, and leases will require the personal guarantee. Then the guarantor can be chased by the collector in the event of the company being gone.

In case dissolution has not been done correctly:
Not informing the creditors or making final documents may result in your company having debts that are not closed. The issue can be reinstated by the collectors who can sue to recover the outstanding debts.

In the event of a fraud or other misconduct:
Owners may be sued in court on fraudulent transfer or bad faith in case the dissolution was committed to evade the payment of debts.

In case the assets had been dispersed prior to paying off debts:
The law permits collectors to recover the owners in cases of the remaining assets spared amongst owners without compensating the creditors.

In simple words – a dissolved company, technically, may be dead but may also have a heartbeat on the financial liabilities grounds.

What is the Length of the Pursuit Period of Debt Collectors?

The period within which debt collectors are allowed to collect the debt is called the statute of limitations. It differs according to your country or state. The debt collection period in the United States, for instance, takes between 3 and 6 years on average depending on the state or the type of contract.

The collectors can still collect at that time but this cannot be imposed on them legally in a court. Nevertheless, by neglecting the debt or dissolving the business to avoid paying may continue to reflect on your credit and reputation and future businesses.

What To Do in Case Collectors Approach You Post Dissolution?

When communicated to by a debt collector of a business that has been dissolved, the following is a wise way of dealing with the same:

Verify the Debt

News: It is necessary to always verify the validity of the claim. Ask to have written down that the debt does exist, and that your business is liable to it, and that you are personally liable to it.

Check Your Dissolution Papers

Enquire whether your company was duly dissolved. You may still owes creditors even as you had not notified them. False claims can be avoided by proper documentation.

Consult a Legal Expert

An attorney specializing in business or debt may look at your case to determine whether you are personally liable or whether the collector has gone beyond his/her legal boundaries.

Avoid Verbal Agreements

It is not advisable to promise or make partial payments without a written agreement. This would re-establish the statute of limitation and more time would be allowed to the collectors to chase you.

Secure Your Credit and Future Business

Uncleared debts in your old company may haunt you in case you decide to open another company. Get all legal issues sorted before proceeding to your next business.

What Happens to Business Assets During Dissolution?

When a company is dissolved, the first thing that happens is that the assets of the company are first liquidated that is, sold in order to clear debt. This process is referred to as winding up. Any surplus after settling the creditors is given out to owners or shareholders.

In case such a step has been not taken or has been taken in an inappropriate way, collectors have the right to locate such assets and claim their portion. Even in situations where a business has been dissolved, the court can still reopen the file of the dissolved business and reclaim the unpaid debts.

Must Read this Blog: What Is Debt Protection on a Loan and Do You Really Need It

Final Thoughts

In some instances, debt collectors are allowed to collect payment even after a firm is wound down. The most important reasons are the way in which the dissolution was managed, and the presence of personal guarantees or misbehaviour.

When you are a business owner and you are about to shut down your company, then you should consider finalizing all the obligations that can be done legally and openly. With appropriate documentation, accurate accounting, and legal advice, the debt collectors will not haunt you many years after you have shut down your business.