Business debt is money which is owed by a business. Business debt can come in many forms. Business debts can be owed to an individual, another business or to the government. It may also be owed to consumers of the business itself. 

A business which owes money to another entity of any kind is called a debtor. The individual or entity to which the money is owed is called a creditor.

Which Business Owners Owe Debt?

Whether the debt of a business is owed by an individual owner or the business itself depends on the type of business. If the business is a sole proprietorship, or a business which is owned by an individual, the single individual and their business are treated as the same entity in the eyes of the law.

The owner of a sole proprietorship is personally liable for the debts of their business. This means that if the business does not have the money or assets to satisfy the debts it owes to a creditor, that creditor may take the owner’s personal assets in order to satisfy the debt that is owed.

If the business is a general partnership, however, the rules regarding the debt of the business are different. In a partnership, two or more individuals share in all assets and debts of a business. 

In the case of a partnership, the debt belongs to each of the partners. If a business is structured as a partnership, the partners may share in the liability for any of the debts of the partnership. In some cases, the partners may agree to be responsible for paying a certain amount of the partnership’s debt.

In a general partnership, any of the partners may be liable for the entire amount of the partnership’s debt. Therefore, if there is one partner with little money or assets, a creditor may seize the money or assets of other partners in order to satisfy the debt. 

After the debt is satisfied the other partners may seek reimbursement under the partnership agreement from the partner who could not pay. However, it is important to note that if the partner did not have the funds to pay the creditors, they likely will not have the funds to reimburse the other partners.

Two other common types of business structures are corporations and limited liability companies (LLCs). In these types of businesses, the owners and the business entity are two separate entities in the eyes of the law. 

Because of this, owners are generally not held personally liable for the debts of the business. In other words, a creditor cannot take individual assets from the owner to satisfy a debt. 

How are Business Debt Disputes Resolved?

If a business cannot satisfy their debts owed to creditors in a timely fashion, the business may attempt to negotiate an agreement for the payment of the debt. One such type of agreement is a settlement agreement.

A settlement agreement is an agreement between the business and the creditor that includes payment terms, length of payments, and amount of payments. In some circumstances, the settlement agreement may allow a business to pay less than the entire amount that is owed. The settlement agreement may also specify an interest rate at which the payments are to be made. 

The parties to the debt dispute may also attempt to settle the dispute using alternative dispute resolution methods such as mediation or arbitration. Mediation involves a neutral third party, known as a mediator, who hears each side of a dispute and attempts to assist the parties in reaching a resolution that is satisfactory to all. 

Mediations are typically non-binding. This means that if the parties do not reach an agreement during mediation, they can still pursue other avenues such as arbitration or a lawsuit.

During an arbitration, the parties to the dispute agree to submit their dispute to the arbitrator. An arbitrator typically has experience resolving business disputes. Arbitrations are typically binding, which means the outcome is final and cannot be altered.

What is Debt Collection?

Debt collection is a process used by creditors to satisfy a debt owed to them. If settlement agreement efforts, mediation, or arbitration are not successful in resolving the issue, the creditor may file a debt collection civil lawsuit in court to recover the money they are owed. 

If a creditor wishes to collect on a debt, they may be required to first give notice to the business debtor that they intend to collect on the debt. Once the required notice is given, the creditor may file a lawsuit against the business and the business owners to satisfy the debt.

In some cases, the creditor and the debtor are in agreement regarding the amount of the debt. In other cases, the parties may dispute the amount of debt owed.

In a lawsuit, the court will hear the arguments of both parties. Each party will present their cases, including what they believe is owed. 

The parties may be required to present evidence to the court supporting their claims, which may include loan documents or promissory notes. The court will hear the evidence and issue a decision regarding the dispute. 

The court will issue an order once it has reached a decision. This order will outline what amount of debt is owed and how that debt is to be paid.

What if a Business Debt Involves a COVID-19 Issue? How are These Types of Issues Resolved? 

Coronavirus, or COVID-19 has changed many aspects of American’s lives, including how business debt may be handled. Many individuals have faced a reduction in their income or even job loss. It may be challenging for individuals to keep up with mortgage payments, credit card bills, and even business debts during this time.

There are many credit card issuers who have provided assistance to their customers including collection forbearance. This may assist some businesses, especially small businesses, in recovering from debt during this time.

In addition, there are banks, credit unions, and other financial institutions that are offering loan extensions and deferred payment options for both personal and small business loans. There may also be governmental programs that provide relief for businesses during this time.

How Long Can Court Proceedings Take?

The amount of time court proceedings take depends on many variables, including the amount of money the debtor owes. If the debtor owes a substantial amount of money, typically five thousand dollars or more, the lawsuit will be filed in a state trial court. 

In a trial court, a dispute may take months or even years to resolve. In addition, the more complex the case is, the longer it takes to reach a resolution.

If the debtor owes a smaller amount of debt, typically five thousand dollars or less, the creditor may choose to file a lawsuit in small claims court. Cases in small claims court typically take less time to resolve than those in a trial court. One reason for this is that the rules and procedures regarding evidence are less formal than in a trial court.

Do I Need a Lawyer for Help Resolving a Business Debt Dispute?

Yes, it is essential to have the help of an experienced business attorney for resolving your business debt. An attorney can provide you advice regarding your rights and your options for settling your debt. Your attorney can represent you during any alternative dispute resolution proceedings and in court, if necessary.