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Dear Your Business Credit,
I am now overwhelmed with credit card debt. I tried to keep my business alive. The business is barely making it and now the monthly bills are hard to pay. Could my creditors garnish my wages? This would not be good since I am already in debt with the IRS. -- Toni
Hang in there. You're in a tough situation, but it is possible to turn it around.
I ran your question by Nick Best, a bankruptcy attorney at Detroit Lawyers PLLC. If you have run up the debt on a personal credit card or on a company credit card that you personally guaranteed, it is possible for the creditor to sue you and get a judgement against you to garnish your wages. However, a creditor would have to sue you personally, as opposed to the business, for that to happen, he says. Often, this is a process that would take about six months for the creditor, so you're unlikely to be taken by surprise, according to Best.
There's another possible scenario where you may find creditors calling. In some cases, the original creditors will charge off an unpaid debt and sell it for pennies on the dollar to a debt buyer. The buyer might try to collect it for a while and eventually, if it can't collect, may sue you. "It will eventually happen, Best says. "I don't know if it will be this year or in six years."
Still, there's one big factor that may work in your favor. In many small businesses, the owner does not get a traditional paycheck, but instead takes a distribution whenever he or she can afford it. That can make it hard for a creditor to garnish your pay. If that is your situation, the creditor may go after the money in your personal bank account to get the distributions. This will require the creditor to seek a periodic garnishment, says Best. But if you don't take money out of the business and put it in that account, creditors will not be able to seize it, even if the court lets them go after your bank account. As a result, he says, "A lot of people are uncollectible."
To avoid the hassle of taking this route, creditors sometimes prefer to do things like go after a debtor's tax refund. "A lot of times it will be next tax season," he says. Since you owe money to the Internal Revenue Service, it seems unlikely your creditors would find this option fruitful.
That could conceivably push them to go after your liquid assets. "If you have a Maserati in your driveway, they can petition the court to seize your Maserati and auction it," Best says. But that, again, is a big headache for them. "No one wants to auction your stuff," Best says.
That could work in your favor. But given that the business is struggling to make money, perhaps it is time to consider whether the company is worth saving. The economy is changing very quickly, and in some types of businesses, it has become very hard to make a living.
If it doesn't seem like you can turn the business around, you might want to consider filing for bankruptcy protection, which I wrote about in a previous column ("Business at risk in personal bankruptcy"). That's not something any entrepreneur wants to hear, but you also have to consider the effect that running a struggling business is having on you. You have been working in overdrive to save it, and if these intense efforts are not paying off and they're leading to debts you can't pay, it may be time to try a new path. I would strongly suggest talking with an attorney with expertise in bankruptcy and debt to find out what your options are.
If you are very committed to this business, then you need to come up with a secondary revenue stream to support it. That could be a new product or service for which there is more demand or perhaps a second job or business for you. Otherwise, you could end up in more debt, which will only make your situation worse.
Try to get away from your business for a day or two so you can think clearly. Many entrepreneurs who have struggled in one business have succeeded in another. Give yourself the chance to consider a different future. Then come back and decide what path is best for you. Good luck!
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