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Freezing business card accounts after the company fails

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Your Business Credit
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Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question for the CreditCards.com expert Dear Your Business Credit,
On Tuesday, Dec. 31, my business partner and I signed the paperwork to close our corporation and cease business operations. In a distribution of debt, I am to receive a number of corporate credit cards that he opened using his name alone and in the capacity of secretary/treasurer.

I do not trust him to cease using those cards. As president of the corporation, do I have the authority to "lock" or "freeze" any further credit on those cards to block him from adding to my assumed debt? Would the card issuers permit me to do this? What would be the best way to handle my problem? Thank you for your service! -- Rob

Answer for the CreditCards.com expert Dear Rob,
Between closing your business and having to work through shutting it down with a partner you don't trust, your situation sounds very frustrating. On the positive side, extracting yourself from the situation will free you to move into the next chapter of your career in 2014, whether that's as an entrepreneur or employee.

You mention that your partner has "corporate" credit cards, which are generally used by Fortune 500 companies or large organizations. It sounds to me like you have a small business, so I'm assuming that what he actually has are business credit cards. There is a difference between corporate cards and business cards. With a corporate card, the corporation often holds liability for payments; with a business card, the primary cardholder is responsible. Nevertheless, if debt has been distributed under liquidation you are right to be concerned about your partner's ability to charge more.

I contacted two attorneys to find out what you can do to protect yourself from any additional spending on the cards by your partner. Each had a different recommendation.

Leslie Tayne, an attorney with Tayne Law Group in Melville, N.Y., who advises small businesses on credit and debt, says that unless your partner, as guarantor of the account, has given the bank authorization to speak on his behalf, you can't get control over the cards on your own.

"He will need to have the partner close the accounts in order to guarantee no more spending is done," she says, with reference to your situation. To clarify, your partner can't completely close the account while there's still a balance outstanding. If he has consumer card accounts, he can cancel any further charging privileges on the accounts while the debt is being paid off.

You'll need to check the cardholder agreements for each card. You may find there is no option for even freezing spending on the accounts.

I also asked for input on your question from Robert Brennan, an attorney in La Crescenta, Calif., who specializes in wrongful credit damage and identity theft. He agrees with Tayne that if the cards are not in your name, you will not be able to stop your former partner from using them.

His suggestion is to contact the credit card companies and have the accounts transferred over to you, as president. "Have the secretary/treasurer's name taken off the account completely," he says.

It is likely you will need your partner's cooperation on this. I'd recommend contacting each card issuer as soon as possible to find out what the process is and what information you will both need to submit. Do this now, not after you have paid down the debts, since your partner will be most motivated to help you when he's worried about the debts he has guaranteed personally.

For other readers who have business partners and are considering getting a business credit card together, I should point out that Rob and his partner did not make a mistake in having the partner open the cards in the partner's name alone.

If you opt for the alternative and open a business card with a partner that you have both guaranteed personally, you are tying your credit together. Even if you trust your partner completely, you will be vulnerable to unforeseen circumstances that your partner could face in the future, such as a divorce or a crushing medical bill that ruins his credit.

Maintaining separate business cards in your own names can be a smart way to avoid that, as I discussed in an earlier column. If you do still opt for a joint account, both partners should have cards, so if one departs, the other still has access to the account.

If there's any lesson here, it's to do some legwork to avoid working with a partner you can't trust. When you're excited about a new business idea, it's easy to jump into business relationships you will later regret. I highly recommend that every business owner check out potential business partners thoroughly. Consult with an employment lawyer about how to do reference checks so you can investigate your partner's past working relationships -- and invite your partner to check your references, too, in the spirit of openness.

Also offer to share your credit report -- and ask for a prospective partner's in return. A business partnership has some similarities to a marriage, in that you're tying your financial fate together. If a potential partner balks at this or puts it off, I'd be hesitant to join forces. You need to know the true picture before you team up, to avoid unwanted surprises.

See related: Getting tax information from a closed small-business account, Will I inherit my partner's debt when I go into business with him?, Is the primary cardholder for nonprofit personally liable?

Meet CreditCards.com's reader Q&A experts
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Published: January 13, 2014


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