Business debt is money owed by a business.This money can be owed to another business, or to the government. In some cases, business debt is owed to consumers of the business. A business that owes money to another is referred to as a debtor. The entity or person owed the money is referred to as a creditor.

Which Business Owners Owe Debt?

Whether business debt is owed by individual owners, as opposed to the business itself, depends upon the type of business. In a sole proprietorship, a business owned by a single individual, you and your business are considered the same entity in the eyes of the law. This means, you, as the owner, are personally liable for business debts. This means that if the business lacks the money and assets to pay a debt to a creditor, the creditor can take your personal assets to satisfy the debt.

A general partnership is a business arrangement in which two or more people agree to share in all assets and debts of the business. In such cases, the partnership debt belongs to each of the partners. Under the partnership agreement, the partners can share in liability for debts. This means each agrees to be responsible for paying a certain amount of debt. Under a general partnership, any partner can be sued for the entire amount of the business’s debt. 

Therefore, if one partner has little money, a creditor can take the money and assets of other partners to satisfy the debt. After the debt is satisfied, these other partners may then, under the partnership agreement, seek reimbursement from the partner who cannot pay. 

Two other types of businesses are known as corporations and LLCs (limited liability companies). These business entities are structured such that the owners and the business itself are two separate legal entities. This means, generally, that the owners are not personally liable for business debts. Creditors cannot take owners’ individual assets to satisfy a debt. 

How are Business Debt Disputes Resolved?

If a business cannot pay debts owed by creditors in a timely fashion, the business can seek to negotiate an agreement for the debt payment. One type of agreement is called a settlement agreement. In a settlement agreement, the business and the creditor agree to payment terms, including length and amount of payments. 

In some instances, a settlement agreement may require a business to pay less than the entire amount owed. The agreement may specify a rate of interest at which the payments are to be made. 

The parties can also attempt to settle a debt dispute through mediation or arbitration. In a mediation, a third-party neutral called a mediator listens to each party’s side of the dispute in an attempt to reach a resolution that is satisfactory to everyone. Mediation is usually non-binding. 

This means that if the parties cannot reach an agreement, they retain the right to go to arbitration or court. In arbitration, the parties agree to submit the dispute to an arbitrator. The arbitrator typically has experience in resolving business disputes. Arbitration is usually binding, meaning the results are final and cannot be challenged.

What is Debt Collection?

If settlement efforts, mediation, and arbitration are not successful, a party may file a debt collection civil lawsuit in civil court, to recover money it owes.  A creditor that wants to collect on a debt may first be required to give notice to the business debtor that the creditor intends to collect. Once any required notice is given, the creditor can file a lawsuit against the business and its owners, to seek the money owed to the creditor.

In some instances, the creditor and debtor agree as to what the amount of the debt is. In others, the parties dispute the amount of debt. In the lawsuit, the court will listen to both sides. Each side will present its case, stating what it believes it either owes or is owed. The parties may be required to present evidence, such as loan documents or promissory notes. The judge will listen to the parties and then issue a decision. The judge will issue an order. The order will specify what amount of debt is owed, and how it is to be paid.

How Long Can Court Proceedings Take?

The amount of time a lawsuit takes depends upon the amount of money involved. If a party owes a substantial amount of money, the lawsuit will be heard in a state trial court. Trial court disputes may take months, or even more than a year, to settle. The more complex the case, the longer it takes to be resolved. 

In disputes where the debt owed is not large, a creditor may file a lawsuit in a small claims court. These are usually disputes involving five thousand dollars at most. Small claims courts typically take less time to decide cases than trial courts do. One reason why is because in small claims court, the procedures and rules about evidence are more informal than in trial court.

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

If you or your business have business debt, or if you or your business are creditors, you should contact a business attorney. A business attorney can explain your rights and options. Your attorney can also represent you in court proceedings.