Debt Collection From a Defunct Business

Your Customer is Out of Business – Now What?


So, your customer went out of business owing you a pile of money, and you’re wondering what to do next. If you’re reading this, I imagine you’re hoping for some kind of collection agency magic trick to get your money back, and there are a few things you can do to try to track your customer down and recover your money. But at the risk of ticking you off and having you never read anything I have to say again, I’m going to state what I believe to be the reality. You blew it.
When you manage your accounts receivable properly in the first place, this generally will not happen.


I wrote that back in 2011. And until March of this year, I would have said it was still relevant and accurate. Then Covid-19 happened. Now, even well-executed accounts receivable management systems are not enough to protect us from good customers going bad. The timing seems right for a new discussion. So what can you do when your customers stop paying or go out of business owing you money?


Consider the wisdom of doing anything at all. Debt collection from a defunct business can be very difficult and time-consuming. Your time might be better spent selling or improving internal systems that will keep you in business and profitable.


Be reasonable. Talk to your customer, consider their intent. Gather information and pay attention to the red flags and warning signs we’ve discussed before. Don’t be a chump but take circumstances into account.  


If the balance and circumstances warrant collection activity, take immediate action! In collections, sooner is always better then later!

Here are some steps you can take on your own.

Local Customers

If your customer is close enough try a quick drive-by.

Years ago, I had a customer who was refusing my calls. I drove to his place of business and found his employees packing up. They insisted he wasn’t there, but I stood my ground and politely but insistently kept grilling them. My customer finally took pity on them and emerged from a back room. I got my money. 
If you find your customer, ask for your money! Failing that, write an agreement on the spot and get a legible signature. Be sure to date it and be specific about payment terms.   
When you can’t find them, talk to the neighbors and see if anyone has an alternate or home phone number or address.  

Not Local

When your customer isn’t close enough to drive by it’s back to the paperwork. Review your old files, look for alternate phone numbers and references. You collected references on your credit application, right?
Call the references and ask them how to locate him. More often than not, the reference will call your debtor to give him a heads up. Then, your debtor will call you to stop you from calling anyone else.
Remember, you are the original creditor so you are not bound by the FDCPA. These calls are legal and do not constitute harassment, but don’t be rude, that gives them an excuse to blow you off.  
Talk to everyone in your company, especially sales, who may have had contact with the customer. Find out what they know. Search the internet for the owner’s and the business name; you might find a home or alternate phone number.
Look for copies of canceled checks. If you have to sue, a canceled check will provide you with banking information. 80% of debtors don’t pay even after you win a judgment. A bank account number will help you with post-judgment collections.

More Information

I found several articles from other collection agencies and debt collection attorneys about debt collection from a defunct business.  To save you some time I’ve included the links here.

As always we have an article from our friends over at the Kaplan Group.  It’s more about why you probably can’t collect from a defunct business than how to but you can read it here.

This one has some good information on collecting from bankrupt businesses but I think they only work in Texas – that said we’re in the process of establishing a relationship with a firm of attorneys who handle post bankruptcy collection, so check with us before you give up – you can read the article here.

This article was written in 2015 but it’s entirely relevant and covers Alter Ego Liability at length.  That is when your customer goes out of business but opens another business doing the same thing and tries not to pay you.  You can read this one here.

The last article is mostly a pitch for why you should use them but they look like they probably know what they’re doing – they’re in Massachusetts – you can read it here.

Wrapping Up

In the end, the most important thing is to take action quickly and decisively. Do NOT be passive and do not wait unless you are willing to lose your money.

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