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Is it possible to collect debt from a business that went under?

On Behalf of | Jun 3, 2020 | collections

We live in unpredictable times. The winds of economic change can blow forcefully and with little warning, toppling seemingly sturdy businesses. The repercussions of this type of collapse can ripple outward, affecting partners, vendors and creditors.

So what happens if a company that owes you money goes out of business, leaving you empty-handed? Fortunately, there may still be a way to collect that debt.

Corporate liability

One key reason an entrepreneur will establish their company as a separate business entity is to protect themselves from liability. While the business can be held responsible, the owner remains safeguarded and their personal property is off-limits.

This applies to debts. Should a business go under, creditors generally cannot sue the business operator directly to recoup those debts.

However, there are some exceptions. In some cases, there may be a way to make this now-defunct company pay up by piercing the corporate veil.

Piercing the corporate veil

The laws around piercing the corporate veil are quite complex, but the concept is simple. Essentially, it allows a corporation’s owner or its shareholders to be held liable for the business’ debts, if certain criteria are met. In Florida, there are two key elements to this:

  • The corporation in question is “the alter ego or mere instrumentality” of a parent corporation or shareholders
  • That parent company or its shareholders engaged in misconduct of some sort

Crucial to these cases is the ability to link a defunct company to a new business entity. That could be a separate corporation, for example, formed by the same owner after their previous business collapsed.

Demonstrating all of this is tricky. It requires an in-depth knowledge of collections laws, backed by years of experience. While not always easy, know there are ways to potentially collect what you are owed – no matter the state of the indebted business.