When a Client Dies Owing You Money

It’s hard to imagine anything more awkward than asking about an unpaid debt after someone dies, but just because it’s awkward doesn’t mean you can avoid it. What happens to an individual or company owner’s debt after they die? It depends.

If an individual dies owing money, generally, their estate is responsible for paying any unpaid debts. Usually, no one else is legally obligated to repay the debt of a person who has died, but there are exceptions to this rule. For example, if there was a co-signer on a loan, or a joint account holder, or in some situations a spouse may be responsible for certain debts. The laws can vary from state to state, and given the sensitive nature of the situation, hiring an experienced collection agency to look into any money owed to you by a deceased individual makes sense. You don’t want to be the person who calls a grieving widow or child asking about an unpaid invoice.

When the person who dies is the owner of a business, the situation is still sensitive and may be more complicated, depending on the type of business. Here are some of the possible situations:

Sole Proprietorship

If the sole proprietor of a business dies, the business now belongs to the estate or the owner’s heirs.  If the heirs don’t keep the business going, they will liquidate the assets of the business to pay off the business debts, and anything remaining will be distributed in accordance with the owner’s will. If the proceeds are not enough to pay all creditors, then technically the remaining business debts are to be paid off by any assets remaining in the estate. It is important that the executor of the estate, or any lawyers, be aware of the debt the business owes you. This is one of the many reasons prompt and organized invoicing is important.

Corporation or S Corporation

Corporations do not cease to exist when a business owner dies. The owner’s estate becomes the owner of either the business, or the previous-owners shares of the business. The business is still responsible for paying the money it owes you. However, depending on how involved the owner was in day-to-day operations and what the beneficiaries of the estate plan to do with the business, the business may be dying soon as well.

Limited Liability Company

The operating agreement under which the LLC is organized should specify what will happen in the event a member of the LLC dies. The operating agreement may allow for continuation on the death of a member.  If the agreement does not say what will happen, state law will determine what happens. Many states require dissolution and distribution of the assets.

Partnership, Limited Partnership or Limited Liability Partnership

If one member of a partnership dies, the business does not necessarily die as well. It depends on the partnership agreement. An agreement may provide for the sale or purchase of a deceased partner’s interest and ensure the continuation of the business. In this case, your business with the client may go on as usual with limited or no disruption.

You, as the vendor, may not know which type of business your client is. This is one of the reasons a comprehensive credit application that includes phone numbers and contact info for various people in the company is important. If your contact, or the business owner dies, it is important that you have other people you can contact about your unpaid invoice. As uncomfortable as it may be to inquire about this shortly after a death, it’s important to do so in a timely manner. If the company is dissolved before your invoice is paid, it can become difficult to recoup your money.

At The Kaplan Group we know that death and debt are two of the most uncomfortable things to talk about. We hope that if you find yourself in this awkward position, you’ll allow us to handle the difficult conversations for you.

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