Expert: Christine Janklow - 5/19/2010

Question
QUESTION: If a business is incorporated and has outstanding debt, already sent to collections, and now collection companies are threatening to sue in court what happens to the debt if we just close the business? I understand that they may try to collect against us personally however, we have been told as a married couple if the debt is my husbands and we have our assets in both of our names they cannot touch those things. Is this true?

ANSWER: Samantha:
Appreciate the inquiry. Depending on the type of business debt it is, and whether or not any security such as collateral or personal guarantees exist is the first thing to identify. This will determine the leverage a creditor may have in the collections process. Just so you are aware if you have not established an independent business credit score (which reports separately to your own individual) and acquired trade lines using the corporations creditworthiness only, than chances are high that some personal guarantee exists. If this is the case, the debt will not go away if the business does, it reverts to the guarantor. Secondly, collection agencies can not sue you, only law firms doing collections can. They also must be in your state of residence to file suit. If you live in a community property state such as California, and there is a personal guarantee then your combined assets could be jeopardized if a lawsuit occurs and judgments are awarded.One thing you can do if you are in default is attempt to negotiate a discounted settlement if you have funds to do so. You can also engage the help of a commercial debt settlement firm to do so for you, or if you are being sued than you must hire legal counsel and address the matter promptly.

I hope this provides you some guidance, if so please take a moment to provide a favorable rating so others can learn from it as well.

Respectfully,

Christine Janklow

---------- FOLLOW-UP ----------

QUESTION: Thank you so much Christine for your in depth answer and time! I appreciate it so much. Some of the debt was personally guaranteed so we thought they would go after personal assets... If the business is liquidated- opened in another name and spouse w/ new tax id number can they try to seize equipment? Also we were under the impression if we made all personal assets jointly owned- husband and wife relationship they could not be touched because the company even though inc. is only under one name. Is this true? By the way I am in PA. Thank you again!!!

Answer
Samantha:
You are most welcome. Let me state this simply - you can run but you cannot hide. If you attempt to avoid payment by assuming a new corporate id, you still have some personal guaranteed debt to attempt resolve with. The personal guarantee has already pierced your corporate veil of protection. If the corp goes insolvent, non-guaranteed debts may go away over time, but if it is vendor related, don't be surprised if they come after you personally as well. Small businesses don't hesitate to sue people to get money judgments. The collection industry is rouge and only settling with money, or bankruptcy will make creditors go away. There is however a statute of limitations in each state where collections can only occur during a certain time frame, in PA it is as follows:
Contracts: 4 years, (used to be six).
Contracts under seal: 20 years.
Sale of goods under UCC: 4 years.
Negotiable instruments: 6 years (13 PA C.S.A. .§3118)

So this is a long time to try and remain under the radar before a debt is paid.

Your best plan is to get with a business debt negotiation firm (such as SettleSource.com) or get a budget together and negotiate your own repayment of the debts over time. If you get sued you need to hire an attorney. In my experience, helping businesses turnaround, ducking for cover is not a viable strategy no matter where you call home.

Good luck!

Respectfully,

Christine Janklow