Notify Creditors of a Business Closure to Limit Your Liability

When and how you notify a creditor you are going out of business depends on whether you owe the creditor money, you have any property that belongs to the creditor, and whether you need any continuing services.

By , Attorney

When you are going out of business, you need to notify the people and businesses you've relied on—suppliers, banks, insurers, customers, and so on—that you're closing. In some instances this is a legal requirement; in others it is a contractual requirement. But in all cases, it's a matter of good business practice. When and how you notify a creditor depends on whether you owe the creditor money, you have any property that belongs to the creditor, and whether you need any continuing services from the creditor.

Notifying Suppliers and Other Unsecured Creditors

Suppliers who provide you with inventory or materials will want to know when the last delivery should be made, whether you're returning any goods, and when and how they'll get paid for goods they've supplied. If you want to continue to receive supplies until you close your doors, wait until the last week to let suppliers know of your impending closure. Obviously, don't order anything unless you know you can pay for it!

When you decide it's time to let your suppliers and unsecured creditors know of your closure, send them a certified letter saying that you will be closing your business and are requesting claims for payment—in other words, final bills.

Creditor Notification for Corporations and LLCs

Your letter should include the deadline for the creditors to submit claims (it varies by state), a statement that their claims will be barred if not received by the deadline, a list of the information that the creditor should send to file a claim, and the mailing address to which the creditor must send the claim. If a creditor does not respond within the time period, your corporation or LLC can generally disregard that creditor's claim.

The deadline for creditors to submit claims varies from 90 to 180 days, depending on your state's corporate or LLC laws (it's 120 days in the vast majority of states). To find out the rule in your state, you will need to check the appropriate provision in your state's Business Corporation Act or Limited Liability Company Act. In at least some states, this will be in a section covering dissolutions.

If a particular creditor does not receive notice that your LLC or corporation is closing down, that creditor's claim may "survive" the closing. Because you may not be aware of all potential creditors, to limit the time period in which a creditor can file claims, you should publish a notice in your local newspaper (and on your website if you have one) that your business is closing down. The published notice should state that a creditor's claim will be barred unless a proceeding to enforce the claim is started within a certain time period, and include a list of the information that the creditor should send to file a claim and the mailing address to which these unknown creditors may send claims. If you are concerned about cutting off significant claims that might be out there, run your letter and notice past a local business lawyer before sending it, to make sure you fulfill all of your state's requirements.

In most states, the time period for unknown creditors (those you're reaching out to with your newspaper publication) to make a claim is two years, but in some states it is five. Again, you will need to check your state's Business Corporation Act or LLC Act for details.

Creditor Notification for Sole Proprietorships and Partnerships

If you don't pay a creditor and the creditor wants to sue you, the creditor must file a lawsuit within the time set out by your state's statute of limitations (usually three to ten years) or be barred. (Find out the statute of limitations in your state.)

Sole proprietors and partners can't further limit the time period in which creditors must make claims, but you can send a short letter to your known creditors stating that your business is closing. You can also publish a simple notice for unknown creditors in your local newspaper. This should help flush out creditors, which is something you might want to do before your partners disappear. If you'd rather not remind customers to send a bill or make a claim (as is true for many sole proprietors) don't.

Notifying Secured Creditors

If you owe a debt that's secured by collateral, such as a vehicle or equipment, let the creditor know you'll no longer be needing the item. If you used the loan to buy the collateral, find out how you can return it. For example, if you were still making payments on a loan for your company car, you could voluntarily surrender the vehicle to the lender or you could sell the vehicle and give the lender the proceeds. If you are going to try to sell a vehicle, check with the lender to find out its procedures to get the lien released on your vehicle—most lenders won't release the vehicle without money in hand, so this may require both you and the buyer going to the lender to pay off the loan.

Even after you turn over a secured asset or the proceeds from selling it, there may be a deficiency, meaning that you owe the difference between what the property was sold for and what you owed on it. Before you turn over the property or sales proceeds, try to negotiate with the creditor to give you a signed release that you will no longer owe money on the debt. Selling the property rather than voluntarily surrendering it may decrease your chance of owing a deficiency on the loan.

Notifying Lenders

If you have a bank loan or line of credit, your bank may call the entire loan in immediately, or will at least want to know how you plan on paying it off. Your loan agreement may give your bank the right to deduct from your business bank account any amount you owe at any time—this is called a right to setoff. So if your business account is at the same bank (which most loan agreements require), don't be surprised to find money taken out of it soon after your bank learns your business will be closing. If there are debts you'd rather pay before paying off your loan, such as payroll taxes or other personally guaranteed debts, be sure to do it before notifying the bank of your impending closure.

If the bank has a security interest in some of your business assets or in your accounts receivable, it may grab this collateral. If not, it might at least want to examine it (and your financial statements) to be sure it's both physically secure and of sufficient value to cover your debt, should you not be able to repay it.

Notifying Service Providers

Service providers, such as utilities and payroll preparers, will want to know the final day you'll require services and how to collect their final bill. Provide this information at least a few days before you cease operations so as not to be charged for extra days. But if you signed any long-term contracts with service providers, such as credit card processors and payroll providers, try to give as much notice of the cancellation as possible to try to avoid any early termination fees. Also, if you have made any deposits with utility companies, find out how to get them back.

Notifying Insurance Carriers

Before you tell your liability insurance carrier to cancel your policy because you are going out of business, read through the terms of your policy to determine whether it covers past acts or whether you'll need to keep it in force for a year or two in case you are sued. If there is a pending legal threat or even a whisper that you might be sued, speak to the insurance company about it—hiding issues when winding up coverage can cause your coverage to fail if you are subsequently sued.

If you find you don't need to keep your liability policy active, the best way to cancel it is to send a written request, by certified mail, return receipt requested. If you think you're entitled to a refund on your premium, ask that it be sent to you and give an address where you can be reached after your business closes.

Cancel other types of insurance policies such as car insurance and workers' compensation if you haven't already.

Negotiating With Your Creditors

Once your creditors have sent you their final invoices, and you have sold off your inventory and business assets and collected accounts receivable to the extent possible, it's time to settle your debts with the creditors. Learn more in Nolo's article Negotiating Debt Settlements When You Go Out of Business.

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