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Tracing Commercial Debt

  • Written by Ron Brown

mug brownIn this issue we will take a look at tracing on commercial debt. With commercial debt the first thing the tracer must establish is liability. Who is responsible for the debt? This action is accomplished by going back to the origination of the indebtedness for basic information. Commercial debt may have been created by a corporation (Inc.), a limited liability corporation (LLC) or any individual purchasing a product for resale or commercial use rather than consumer use.

Corporations

When tracing a corporation, the tracer must fully understand the “corporate veil.” This veil insures that a company is treated as a separate legal entity than registered owners and stakeholders. The company is then liable for its debts, not the individuals who own it unless those individuals have signed a letter of guaranty. If there are letters of guaranty, then the tracer may proceed to locate the principals of the corporation who signed the personal guaranty. If there are no letters of guaranty, the tracer must determine if there are any corporate assets which might satisfy the debt and who might be in control of those assets. A starting point for the tracer with any corporation is the incorporation documents which are usually held by the Secretary of State in the state where the corporation was formed. The incorporation documents should provide the tracer with the names of the incorporators, the names of the shareholders and the name of the legal service agent. After obtaining this information the tracer then should contact each person involved to determine if there are corporate assets available. The tracer at this point is tracing assets rather than actual people.

Limited Liability Corporations

When tracing on a LLC the tracer should pay particular attention to the fact that a limited liability corporation only offers liability and financial protection if the corporate veil is not pierced. The corporate veil is pierced if an individual uses the LLC to pay for personal expenses, does not maintain LLC paperwork, or pays LLC bills out of a personal account. The limited liability of the LLC can then be challenged by creditors, who can sue the private individuals for the outstanding commercial debt. If this is found to have occurred during the tracing process the tracer would resort to standard tools and techniques to locate the private individuals involved and any assets they may possess which could be used to satisfy the indebtedness. If the LLC is sued and loses the judgment or goes bankrupt, the commercial debt can only be collected from the LLC. The debt can be collected by forced sale of assets located by the tracer, such as buildings and equipment, and garnishment of business accounts.

Individual Purchase for Commercial Use

It is very important for a professional tracer to determine if they are tracing on consumer debt or commercial debt. Consumers and debt covered under the FDCPA are specifically defined as personal, family or household transactions. Therefore, debts owed by businesses or by individuals for business purposes (commercial debts) are not subject to the FDCPA. There are no U.S. federal laws, similar to the FDCPA, that regulate third-party commercial (business-to-business) debt collection or provide guidelines for the conduct of tracers when working on commercial debt claims. The FDCPA doesn’t cover debts incurred to run a business. A good rule of thumb for a tracer is to look at what the money was used for rather than where it was obtained or the name on the transaction.

Here are some common types of consumer purchases which may be classified as commercial debt:

• Credit Card Debt - If only certain cards were used for business expenses, this determination will be easy. But it is likely the tracer may need to check statements to determine whether the purchases were for non-consumer purposes. Purchases of business inventory and equipment or cash advances deposited into the business to pay business expenses are not consumer debt.

• Mortgages - Mortgages on business property are business debt. A mortgage on property purchased as an investment property to rent out is a business debt.

• Car loans - If a vehicle is purchased to use only in business, this is a business debt. If the family car is used to make business sales calls, it is a consumer debt.

• Personal Guarantees - Personal guarantees of business debts remain business debts.

As it should now be very apparent when tracing on commercial debt, there may be a different set of rules involved. The professional tracer must know the rules if they are to be successful in locating the correct entities or parties responsible for satisfying commercial debt.


Ron Brown is a member of the National Association of Fraud Investigators and the author of “MANHUNT: The Book.” Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..