As a business debt expert, I am often asked questions by business owners that run the gamut of complexities that occur when a business or an owner is faced with debt or credit issues. Rather than list the too many- to-name scenarios, I have selected some of the most frequently described situations, which are real life business issues asked by real people (names and details may have been changed to protect identities) and some answers I have provided to highlight options or provide solutions.
In a downsized economy, many businesses are focused on buying out competing businesses, or selling to long time employees, often assuming or assigning the business liabilities as a part of that transaction. The intention is honorable, however the execution may not be as simple as it seems to pay off someone else’s debts.
Question: “I manage a small business with five full time employees. I want to buy the business, it is a LLC, but has a significant debt comprised mostly of credit cards and a bank line of credit. The debt is around $80k. The owner is ready to go bankrupt. I want to purchase the business and wonder if I can arrange to pay less each month. We pay nearly $2500 a month on the debt and I would like to close the accounts and pay around $1000 per month. Can we tell the creditors that we will pay a reduced amount each month, take it or leave it? It is a good business worth saving.”
Answer: When buying a business, you will not automatically assume the debt, as the prior owner has likely signed a personal guarantee. Whether or not the owner is still involved with the business, they are responsible for payment. However, if you are assuming payment of the accounts, you should call the creditors with the owner on the line, and have them authorize you as payer. As well, you need to ask to be put into a hardship payment program as you have described the need for a lower payment. This may or may not be commensurate with your suggested budget; however, most credit card companies will offer this, although some not until the account is delinquent. The purpose of these programs is to lower interest and payments for a period of time usually from 9 months to 5 years. At some point you may also elect to negotiate settlements with the creditors to pay the accounts off at a discount. If you do assume responsibility for payment, make sure that no one including your new employees will have charging privileges and that the lines are closed from further activity. This will help prevent “issues” as you are attempting to pay off the balances.
Even more common is the notion that many small business owners have, which is if they have incorporated and can elect to no longer pay for the businesses debts and there will be no recourse by creditors against them personally. What they fail to realize is that since most bankers weren’t born yesterday, have issued products whereby 9 out of 10 require personal guarantee. Therefore even if the business should fail, it is the responsibility of the owner to pay, regardless of his loss of income through the business.
Question: “My LLC failed and I have two business credit cards of which approximately $45k is owed. I just finished a six month hardship program. I’d like to know if my personal credit score will be affected if I stopped paying on these debts. I haven’t paid my corporate renewal fees for two years. I didn’t use my social security number to open these accounts only my business ID number.
Answer: If you have not already discussed renewal of the hardship program with your creditors, you should if you want to continue to pay the debt down. Many will extend this up to 12 more months. As well, it is difficult to say if you did or did not really personally guarantee the lines. Most banks require this even if you never provided a social. Simply defaulting and hoping they don’t come after you personally is risky without a plan to settle or file bankruptcy at some point. Most creditors are aggressive with collections and may possibly file suit to secure payment on the account. If you are able to offer up a settlement amount that is less than what you owe, you might want to so as to prohibit further collections actions.
Question: “If a business is incorporated and has outstanding debt that has been sent to a collection agency and now is threatening to sue in court what happens to the debt if we just close the business? I understand that they may try to collect against us personally. If I am married and we have our assets in both of our names and my wife is not part of the business, can they still pursue our personal assets?”
Answer: Depending on the type of business debt it is important to identify whether or not any security such as collateral or personal guarantees exist. This will determine the leverage a creditor may have in the collections process. Just so you are aware if you have not established an independent business credit score (which reports separately than your own individual score) and acquired trade lines using the corporation’s creditworthiness only, than chances are high that some personal guarantee exists. If this is the case, the debt will not go away if the business does as it reverts to the guarantor. Secondly, collection agencies cannot sue you; this is usually only done by law firms conducting collections. They also must be located in your state of residence to file suit. If you live in a community property state such as California, and there is a personal guarantee then your combined assets could be jeopardized if a lawsuit occurs and judgments are awarded. One thing you can do if you are in default is attempt to negotiate a discounted settlement if you have funds to do so. You can also engage the help of a commercial debt negotiator to do so for you, or if you are being sued than you must hire legal counsel and address the matter promptly.