Debt Collection Protection For Sole Proprietorships

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 What is Debt Collection Protection For Sole Proprietorships?

Before learning about debt collection protections for sole proprietorships, it may be helpful to know exactly what a sole proprietorship is first. In general, a sole proprietorship is a type of business organization that is run by a single individual.

Under this business model, the individual is considered the sole owner (i.e., the proprietor) and thus can be held personally responsible for any liabilities or debts incurred by the business. In other words, the proprietor and the business are treated as a single entity.

Now, debt collection protections refer to laws that prohibit deceptive, unfair, and abusive acts when engaging in debt collection activities. For consumers, the primary source of debt collection protection stems from a federal law known as the Fair Debt Collection Practices Act (“FDCPA”).

Despite the fact that a sole proprietorship and its owner are treated as a single entity, they are not covered by this Act since its provisions explicitly state that the law does not apply to business debts. Instead, debt collection protections for sole proprietorships will primarily be governed by contract law, as well as by the fair practice guidelines set out by the Commercial Collection Agency Association (“CCAA”).

An alternative option to gain debt collection protection for sole proprietorships is to forgo the idea of creating a sole proprietorship altogether in exchange for registering as a corporation or limited liability company. This way the business and the individual will be treated as separate entities, as opposed to a single entity that could be held responsible for all debts.

Why Doesn’t the Fair Debt Collection Practices Act Apply To Sole Proprietorships?

As briefly discussed above, the FDCPA does not explicitly apply to sole proprietorships; partly, because both the courts and the law view businesses as being savvier than their consumer counterparts. Although this might not be true, courts presume that businesses would know better than to enter into a contract without seeking the advice of counsel and thus should have to shoulder the heavier burden.

Additionally, the text of the FDCPA defines precisely the types of debt collections that it covers, such as credit card debts, mortgage payments, household-related debts, personal debts, medical expenses, and family debts. These examples are debts that would be held specifically by consumers, not businesses. In contrast, the law never even remotely mentions any debts that would be considered a form of a commercial debt.

Thus, the drafters of the FDCPA never intended for it to be a measure of protection against debt collections for sole proprietorships. In general, commercial debts consist of debts owed for business purposes like renting office space or purchasing inventory.

Is There An Exception To When The Fair Debt Collection Practices Act May Apply To Sole Proprietorships?

There are a handful of courts that have held that the FDCPA does apply to debt collection activities involving sole proprietorships. One court has gone as far as to say that the definition of a “consumer” in the FDCPA essentially covers business debts, so long as they are incurred by a sole proprietor or sole proprietorship.

A different court has ruled that a commercial debt will be converted into a consumer debt under the FDCPA if the debt collector calls the private residence of the owner of the sole proprietorship and harasses or abuses them.

While neither one of these cases has been directly overruled by another court, both cases have been critically received by the majority of other courts across the country. Some states have also disagreed with the two rulings. For instance, California, which has adopted an act similar to that of the FDCPA, has specifically stated in its Consumer Agency Legal Guides that the Act does not apply to sole proprietorships.

Thus, exceptions for the FDCPA regarding sole proprietorships and debt collection protections are few and far between. The best case scenario when attempting to obtain remedies for improper debt collection practices is to review the laws of the jurisdiction where the activity occurred or to consult a local bankruptcy or business lawyer for further legal advice on the matter.

Are There Other Remedies Available To A Sole Proprietor If Debt Collection Is Perceived As Unfair?

If a sole proprietor feels that a particular debt collector agency acted unfairly or deceived them in collecting debts, there may be some other legal remedies available that they can recover.

However, if there are any legal remedies available to a sole proprietor in an unfair debt collection case, they will most likely be based on the terms of a contract between a sole proprietor and their collections agency, the laws of the state where they are located, the facts of their specific case, and/or the type of claim being filed.

For instance, some common examples of the types of claims that have been filed for unfair debt collection activities that have also resulted in legal remedies for a prevailing sole proprietor include: those for intentional or negligent infliction of emotional distress, defamation, abuse of process, invasion of privacy, violation of state statutes, breach of contract, malicious prosecution, fraud, and/or interference with employment or professional relationships.

One final note about the remedies associated with the above listed legal claims is that the majority of these lawsuits resulted in a monetary damages award, an injunction for the debt collection agency to revise their debt collection practices, and/or a reversal or reduction in the amount of debt to be repaid.

Lastly, to learn more about the types of remedies that may be available for a sole proprietor or to ensure that an abusive debt collector no longer contacts a sole proprietor directly, the individual should hire a local business or bankruptcy attorney to find out what kinds of legal options they can pursue against a debt collection agency.

Should I Seek An Attorney?

If you are the owner of a business that is structured as a sole proprietorship, then it is crucial that you understand the laws governing them, know how to properly file both state and federal taxes for them, and are aware of the legal rights you have as a sole proprietor.

Therefore, if you have any specific questions or would like to learn more about sole proprietorships in general, then it may be in your best interest to contact a local debt collection attorney for further legal advice.

An experienced debt collection attorney can answer any questions you may have about sole proprietorships, can discuss the tax laws and requirements for sole proprietorships in your state. They can also determine whether a sole proprietorship is the right type of business organization for your needs.

Additionally, if you need help in preparing and filing the paperwork to set-up your business, your attorney can also assist you in completing this process as well.

Finally, if you believe you have been subjected to abusive, unfair, or deceptive debt collection practices and you wish to file a claim against a debt collection agency for their actions, a debt collection attorney can perform legal research to find other ways for you to take legal action against a debt collections agency. Your lawyer can also assist in preparing and filing any necessary legal paperwork with the appropriate court and can provide representation.

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