Disability income may be safe from business-debt collectors
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Dear Your Business Credit,
I am on permanent disability and my credit card is in my corporate name. My corporation is out of business. Do I have to pay the debt? -- Steve
Very likely, a credit card company can try to collect from you. Most small business credit cards require the owner to sign a personal guarantee, as Garrett Sutton, an attorney with Sutton Law Center, in Reno, Nevada, and author of "Finance Your Own Business" and "The ABCs of Getting Out of Debt," pointed out in an email. "Unless your company was large and well established when you applied, it is likely you did so," he said in his note. "With a personal guarantee, a lender can try to collect from you personally."
To see where you stand, try to find the paperwork you signed to apply for the card or ask the credit card company to send you a copy. If you did give a personal guarantee, the credit card company has a big incentive to pursue you for the debt, since you are personally responsible. Whether your lender will win is another matter.
"Just because they can try doesn't mean they will be successful," Sutton said. "If this is an older debt, it is possible the statute of limitations has expired. If the lender tries to sue you and the debt is outside the statute of limitations, you can raise that as a defense against the lawsuit."
Does the fact that you receive disability payments protect you? Sutton said that Social Security disability income is usually safe from garnishment. However, he added, if you have mingled those funds in accounts with other non-exempt funds, you could run into problems. You should always keep Social Security funds in a separate bank account from any other money you have.
What if you have already comingled funds by, for instance, putting them in a bank account with a spouse's paychecks? He recommends separating the funds going forward, on the premise it will give you grounds for an argument that only the money in the account where you deposit your disability payments is yours.
In the event you still do end do end up having to pay the debt and you have a disability that has permanently prevented you from working, you will be in a pickle, unfortunately. Your options for coming up the cash you need will be very limited.
Should you find yourself on the hook, I'd suggest you get advice from an attorney in your state who works with small businesses on debt-related issues to find out what your options are. You or your attorney may be able to negotiate a settlement with the credit card company where it accepts partial payment. This will likely hurt your credit, but any damage to your credit profile may be less pressing to you now than it once was, given that you no longer need to borrow to fund a business.
You may, alternatively, be able to persuade family members to lend you money in a lump sum and pay them back slowly from your disability payments each month, so you can pay the credit card company quickly.
Your story is a good reminder of why I always recommend taking on debt cautiously as you build a business. I get many letters from readers who are struggling with debts from businesses that have long since closed, and the debt makes their lives very difficult.
For anyone considering starting a business, I'd suggest limiting your borrowing by launching it part-time, if that's possible, and financing it with the salary from a full-time job. Take it full-time only when you have the cash flow to cover your expenses with sales. This requires a lot of effort, but if you use this approach, you won't find your future lifestyle suffering if the business ever has to close.
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