Handling debts upon the death of a sole proprietorship owner: liable parties and key considerations for litigation

When the owner of a Sole Proprietorship dies, the business’s debts do not automatically terminate but continue to be paid through the inheritance. In practice, many creditors have difficulty identifying the right person responsible for repaying debts, identifying Defendants to initiate lawsuits or preventing the dispersal of assets. From a legal perspective, creditors’ rights are fully protected by law if they firmly grasp the following regulations:

1. Debt Settlement Obligations When a Sole Proprietorship Dies

Unlike limited liability companies or joint-stock companies, a Sole Proprietorship is not a legal entity. According to Clause 1, Article 188 of the Law on Enterprises 2020 amended and supplemented in 2025 (“Law on Enterprises”), the business owner bears unlimited liability with all of his or her assets for all activities of the enterprise (including other personal assets not directly related to business such as houses, land use rights, etc). Therefore, the debt of the Sole Proprietorship is essentially the property obligation of the individual owner of the Sole Proprietorship.

When the owner of the Sole Proprietorship dies, the business’s debt is determined as the debt of the deceased person to the individual or legal entity. Pursuant to Clause 8, Article 658 of the Civil Code 2015 (“Civil Code”), this debt is prioritized for payment before dividing the inheritance. Accordingly, the heirs will be obliged to pay in proportion to the portion of the inheritance they will receive according to the provisions of Clause 1, Article 615 of the Civil Code.

In case the deceased has no heirs according to the will and according to the law, or these people all refuse to receive the inheritance or are disinherited the handling of assets will be carried out in accordance with Article 622 of the Civil Code. Specifically, after paying all the property obligations specified in Article 658 of the Civil Code, the remaining inheritance will belong to the State.

In short, when the Sole Proprietorship owner dies, the obligation to pay the business’s debts still exists, unless the entire assets of the Sole Proprietorship owner (including assets invested in the business and other personal assets) are no longer sufficient to fulfill the payment obligation.

2. Responsibility to perform property obligations left by the deceased, including debts of Sole Proprietorships

According to Article 615 of the Civil Code, the heirs are responsible for fulfilling the property obligations left by the deceased within the scope of the inheritance. The law does not require the heirs to use their own property to fulfill property obligations of the deceased, unless otherwise agreed between the parties. Payment liability is determined based on the status of the inheritance, specifically:

• In case the estate has not been divided, the payment obligation is carried out by the estate administrator on the basis of agreement between the co-heirs.

• In case the inheritance has been divided, each heir must fulfill obligations corresponding to the portion of the property they received, but not exceeding the value of the inheritance received.

• In case the heir is an agency or organization receiving the inheritance under the will, that organization must also perform the property obligations left by the deceased, similar to individual heirs

It should be noted that according to Article 658 of the Civil Code, other debts to individuals and legal entities are not prioritized for payment but must be placed after many other obligations such as funeral expenses, alimony, tax obligations and amounts payable to the state budget.

3. Legal mechanism to prevent the dispersal of inheritance in order to evade payment obligations

In order to prevent the risk of heirs intentionally transferring or renaming assets to dissipate the inheritance, creditors should proactively apply the following legal measures:

Firstly, send a demand for payment, as soon as they become aware of the owner’s death, the creditor needs to immediately send a written notice demanding the fulfillment of payment obligations (obtaining a bailiff’s official record for evidentiary purposes) to the address of the Sole proprietorship and its legal heirs. This is the basis to prove that the creditor has notified and demanded the fulfillment of the obligation.

Secondly, if the creditor notices signs of dispersal of assets, it is necessary to immediately initiate a lawsuit and at the same time file a petition requesting the Court to apply Provisional Emergency Measures under the Civil Procedure Code 2015. The Court may issue a decision to freeze the bank accounts of the Sole proprietorship and the deceased owner, prohibit the transfer of property rights to the disputed assets, seize the disputed assets, and apply other necessary measures to preserve the inheritance in the process of settling the case. The timely application of this measure will help ensure the integrity of the estate, limit the risk of asset dispersal and create a basis for the parties to seriously participate in the process of negotiation and settlement of debt obligations. Note that when requesting the application of provisional emergency measures, the requester may have to perform a security obligation under the Court’s decision to compensate for damages that may arise if the request for the application of the measure is unfounded.

Thirdly, in case there are grounds to believe that the heirs refuses to receive the inheritance in order to evade property obligations under Article 620 of the Civil Code, the creditor has the right to request the Court to declare the refusal to receive the inheritance invalid.

4. Some notes when initiating a lawsuit to request the fulfillment of payment obligations for debts of Sole proprietorships upon the death of Sole proprietorship owners

In case the negotiation fails or the heirs do not cooperate in payment, the creditor has the right to initiate a lawsuit at a competent Court. However, in order to avoid prolonging the settlement time or encountering difficulties in the process of judgment enforcement, creditors need to pay attention to the statute of limitations for initiating a lawsuit, identify the right Defendant and prepare sufficient documents and evidence in accordance with the law.

4.1. Statute of limitations for initiating a lawsuit

According to Clause 3, Article 623 of the Civil Code, the statute of limitations for creditors to request heirs to perform property obligations left by the deceased is 03 years from the time of opening the inheritance.

Upon the expiration of this 3-year time period, the creditor will lose the right to initiate a lawsuit to request the Court to settle, unless the creditor proves that there is a force majeure event or objective obstacle that leads to the inability to initiate a lawsuit on time, this time is not included in the statute of limitations for initiating a lawsuit under Article 156 of the Civil Code or there are grounds to restart the statute of limitations for initiating a lawsuit under Article 157 of the Civil Code.

4.2. Correctly identifying the Defendant in the case

Because the Sole proprietorship does not have a legal entity and the owner of the Sole proprietorship has passed away, a claim brought directly against the sole proprietorship would not be legally sustainable. Creditors need to base on the status of management and division of the estate to correctly identify the Defendant as follows:

• In case the estate has not been divided: The Defendant is the estate administrator as agreed upon by the lawful co-heirs of the deceased Sole Proprietorship owner, according to the laws on inheritance. In case the co-heirs have not reached an agreement on the administrator of the estate, the Court will summon all the legal heirs to participate in the proceedings as the Defendant to thoroughly settle the case.

• In case the inheritance has been divided: The Defendant is the heir who has received the inheritance and is inheriting property rights and obligations related to the debt. These individuals will participate in the proceedings to settle the corresponding debt according to the inheritance received.

• In case the estate is distributed to the organization according to the will: The organization receiving the inheritance under the will shall participate as a Defendant. However, if the organization does not have a legal entity (e.g., branches, representative offices, or affiliated units), the Court will determine that the legal entity or the owners establishing the organization is the Defendant responsible before the law.

4.3. Lawsuit documents need to be prepared

In order for the Court to accept the case, the creditor needs to prepare a complete set of legal documents (the attached documents must comply with the formal requirements of procedural law, and original copies should not be submitted arbitrarily without a Court request), including:

• Lawsuit Petition;
• Documents proving the debt: Contracts, loan papers, invoices, etc;
• Debt reconciliation minutes or confirmation of payment obligations (if any);
• Death certificate or documents confirming the business owner has passed away;
• Certificate of business registration for the Sole Proprietorship;
• Documents identifying the legal heir (a will or the Declaration of Inheritance);
• Documents and evidence related to the inheritance such as land use rights, bank accounts, vehicles and other assets.

From this, it can be seen that correctly identifying the subject responsible for payment, accurately applying procedural procedures and promptly preserving the inherited estate are crucial steps for creditors to protect their own rights. For cases that are complex, involve significant value, or carry the risk of illegal asset transfers, securing a lawyer’s assistance from the early stages will help creditors mitigate legal risks, build an appropriate litigation strategy, and enhance the likelihood of actual debt recovery.

The above is an article on “Handling debts upon the death of a Sole proprietorship owner: liable parties and key considerations for litigation”. If businesses have any issues or concerns, please contact TNTP for timely assistance.