Expert: Christine Janklow - 6/4/2008

Question
Hi Christine,

I work for a nonprofit that has a small retail outlet that sells very specialized books and posters related to our nonprofit's mission.  Perhaps because we are a nonprofit, some of the previous sales staff may have taken a more laid back approach to debt collection.  One case in point is a debt to one company that is a year old.  This company called in an order yesterday and I checked their balance, sure enough, they owed.  I asked about their plans for payment of this purchase order from 2007.  The company's purchasing manager informed me that the business is now under new ownership and that the new owner is no longer responsible for the business' debts accumulated by the prior owner as of May 1, 08.  We, as the creditors, received no notice to this effect.  My understanding is that if a person buys a business they also acquire the debt of that business unless arrangements were made prior to the purchase of the business.  Am I incorrect in this assumption?  As a creditor, I would have expected some sort of notice that the business was changing hands and how to collect on our outstanding debt.  Despite this, the new owners are claiming that they are not going to pay the outstanding balance as they are not the ones who made the purchase order in the first place.  The company has the same name, address, phone numbers, and employees.  Is the "company" responsible for this debt though the company changed hands, and if so, does that mean that the new owners are therefore liable?

Answer
Dear Stacey:
Thank you for your question. Although I am not in the business of collections, rather that of arbitrating debts I can only comment on what I believe the best course of action might be. As you are likely aware, the "squeaky wheel gets the grease". Now that you have revealed that money is owed your organization, you may as well pursue trying to collect. This begins with a process of verbal and written communications and you may be able to find many sample collections letters online. You must be aware that their are laws protecting debtors under the Fair Debt Collections Practices Act. If you are to endeavor in this you must be apprised of those rights. This is a tenuous venture at best, and one that may not yield much unless executed correctly. I prefer you hire a licensed/boned commercial collections agency to do the "heavy lifting", because they follow a process and are usually paid on contingency for what is collected. Keep your costs down, or move on but do not sell to them again unless on C.O.D. As for liability of the new ownership, I don't know what they agreed to with the prior owner but surely the debt should have been disclosed on the balance sheet during their due diligence. If all remains the same, than you should just pursue collections against the company, not the owners. The company clearly has assets that may serve to pay the debt. I hope this helps.

Respectfully,
Christine Janklow