Collecting Debt from a Closed Business

Imagine a situation in which you have a long-term customer whose bills are beginning to pile up. You might begin to wonder what has happened to the business, and whether they are still able to fulfil their payments. In fact, this could often be due to the business closing or even bankruptcy, a situation which makes it much more difficult for you to get paid on time.

In this case, you should understand how to go about collecting debt from a closed business. This process is not as simple as with active or financially healthy companies, but it is not impossible. Keep reading to find out more about how this works.

What happens if a company goes bankrupt?

Bankruptcy is actually a term that is used for individuals, whereas insolvency is used for companies. This can be defined as an inability to pay the bills, or when the value of assets becomes less than the value of liabilities. A number of factors can cause a company to become insolvent. For example, one of the most common causes is a poor cash flow caused by overproduction or a failure to receive timely payment from clients.

But what happens if a company goes bankrupt? Well, there are a number of different stages to the process. Firstly, the company must immediately cease trading, and no payments will be made to anyone. During this stage, most companies will seek advice from an insolvency practitioner to form an exit strategy.

The next stage is known as liquidation, which is overseen by an insolvency practitioner. They have various jobs to complete during this process, including settling legal disputes, selling company assets, completing any relevant paperwork and paying VAT bills. Most importantly, this stage includes making payments to creditors, and this is exactly how to collect money from a closed business.

How to collect money from a closed business

The first thing to do is to wait until the business is bankrupt. Debt will then be dealt with in the liquidation stage. If this is taking a long time, you can in fact apply to bankrupt a company or organisation so that you can receive your payment faster.

Once the company has entered liquidation, how you approach debt collection will depend on the specifics of your situation. Firstly, the insolvent company will be forced to sell their assets and this money is shared with creditors. However, there is a priority list, meaning you may not be first in line to receive this payment. Any fees and charges for the bankruptcy are first paid, preferential creditors and those holding floating charges over assets will then be paid off. Following this, unsecured creditors and shareholders are next in line.

In order to collect debt from a closed business, you will have to register a claim as a creditor. You should be contacted by the company’s insolvency practitioner who will request you to do this. You might want to consider enlisting legal help to deal with this process, but of course this will eat into your eventual payoff, and may not be worth it for smaller debts.

Alternatively, for cases where you have paid for a product or service and not received it, you can apply for chargeback from your bank or card provider if you paid using a credit card, or a section 75 claim if you paid using a credit card.

What is bad debt write off?

Bad debt refers to situations where a customer is unlikely to pay their debts, but what is bad debt write off? In a situation where a customer or organisation appears unable to pay off their debts to you, even after selling off their assets, it’s important to deal with this in the appropriate manner. You should record this debt as an expense which can be filed under an account that covers bad debt, and this can then be recorded in the profit and loss report.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.