Defaulting on some of your cards risks losing them all
Your Business Credit
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.
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Dear Your Business Credit,
I am employed by my own small business. It is failing, and I
may just have to shut the doors. It is a child care. I own (or used to) the
building appraised for $575,000. I borrowed $71,000 on seven credit cards to
keep the business going. I will now walk away from the business owing $130,000.
If I can keep two credit cards current, but default on the other five, what happens
to the two I keep? Will they close my account? One is an American Express that
I have had since 1984. Please advise and thank you so much! -- Tom
I am sorry to hear about the challenges you're facing.
To answer your question, I spoke with Richard Fine, a lawyer in Houston, for advice. Typically, he says, if you default on some of your credit
cards, the other card issuers will notice this on your credit report and may
lower your credit limit -- sometimes dramatically. "All of a sudden, your
$10,000 credit limit is suddenly $500," he says, as an example.
If you stay current on paying the two cards you want to keep
open, the card issuers may not have much of an incentive to terminate your
accounts. However, there is a chance that the issuers of these two cards will
close your accounts, too. "They have a right to shut them down," he says. Practices
vary among the card issuers, according to Fine, so it is hard to predict
exactly what will happen in your situation.
You didn't mention whether you are filing for bankruptcy
protection. If you are and have balances on the two cards, you might
consider including them in your bankruptcy case so you can get the debts
discharged, he suggests. In any case, you may not have much choice about keeping
them open. In a bankruptcy, the issuers would probably shut them down, he says.
If you still own the commercial building you mentioned, it is
likely to be considered an asset that can be used to pay off your debts in
bankruptcy court, Fine says. Bankruptcy laws vary from state to state, so it
would be smart to get advice from a pro bono lawyer who is familiar with the
laws of your state (for advice on how to find one, see "Finding a free bankruptcy attorney for business, consumer debt."
Before you turn to bankruptcy, however, I would consider
whether there are ways to attract more business to your childcare center and
get your debt payments under control. I
have interviewed thousands of entrepreneurs over the years, many of whom have found
inspiration for turning around their businesses when facing situations like
yours. It could be that if you market your business better, you will attract
the revenue you need to stay afloat.
Instead of trying to save the business in isolation, get some
advice from experts. Nonprofit microlenders often help entrepreneurs who own
daycare businesses. It might be worthwhile to talk with some of the microlenders
in your area to see if they can advise you and perhaps introduce you to some
refinancing options that will lower the monthly payments on your debts. The
nonprofit microlender Accion has a presence across the country and provides
extensive help for entrepreneurs. Your district office of the U.S. Small
Business Administration can also direct you to microlenders in your area. The SBA
has district offices throughout the country; the one near you may be able to help. You have put so many of your
personal resources into this business that it is worth getting some help to save
It's also important to do everything you can to protect your
credit rating -- especially if the child care business does fail and you need to
apply for a job. Some employers request to look at job applicants' credit reports
before hiring them.
Entrepreneurs tend to be natural risk takers, but in today's
economy, it's important to be a little more cautious than in the past. Many
entrepreneurs are realizing this. A spring
2013 survey by The Hartford insurance company found that a whopping 80
percent of small business owners rated themselves as "conservative" when it
comes to taking risks with their companies, compared to 49 percent in the
spring of 2012. While you don't want to overly cautious, it's important to
consider the long-term impact of any debts you take on, so they don't come back
to haunt you. There could be other means of financing that are just as
effective, without the risk that comes with building up a lot of credit card
See related: Bankruptcy filings plunge in first quarter of 2013, In case of default, business credit cards get personal, Rebuilding credit to run your new business
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Published: June 17, 2013
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