Business card debt may hurt credit, even after the company is sold

Liability for old credit card debt depends on original card agreement

Reporter Jeremy M. Simon
Jeremy M. Simon is a former staff reporter for who covered credit reporting and scoring issues.

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Question for the expert

Dear Credit Score Report,
I opened a business credit card for my old company, which was bought out. When the new owners purchased my company, they assumed the debt. However, they informed me they can't pay the account any more like they were supposed to. I checked my credit, and the card doesn't appear. If the account goes bad, will it be listed on my personal credit report? The debt is no longer mine. The account was just never closed, which was my mistake. Thank you. -- Steve  

Answer for the expert

Hey Steve,
There's one guaranteed way to know if that unpaid business debt will appear on your personal credit history: Ask the card issuer.  

To start, pick up the phone and call the bank that issued your business credit card. When you reach the bank, tell about the sale of your business, the current situation that you described above and your concerns about the impact on your personal credit history. Most importantly, you'll need to find out the details of your agreement with that bank, which was signed when that card was first opened. That agreement may supersede everything else: If the agreement says the debt remains your responsibility, regardless of the company's sale, your personal credit may suffer if the bank doesn't get paid.

"From a credit perspective, it all depends on what was in that agreement signed with the original card issuer," says Tracy Yarmolich, assistant vice president of commercial information solutions with credit bureau Equifax.    

There are three main possibilities:
  • Personal guarantee. As a personal guarantor, you are essentially a co-signer on the account and remain liable for any debts the business incurs. "You have personally guaranteed you are going to be responsible -- and are responsible even if there is an ownership change," says Yarmolich.
  • Business guarantee. This type of agreement is established between the company and the card issuer, making the business itself (rather than the current or former owner) responsible for repayment. With this type of agreement in place, you should be safe. The bank "can't go after the former owner for payment once the business is sold," says Yarmolich.
  • Combined guarantee. Some bank agreements may involve a combination of the two types of guarantees described above. The exact details will depend on the issuer. American Express, for example, has previously explained that some of its products offer "joint and several liability," which holds both the business and owner responsible for debts.

All of this means that it's crucial that you update the card issuer regarding the sale of your business. Don't assume the bank knows the details of your situation. The bank would likely have no reason to think anything has changed, assuming it is getting repaid each month. The bank "will keep cashing the check no matter whose name is on it," says Gregg Weldon, chief analytical officer with AnalyticsIQ and a former score model builder for Equifax. However, once those payments stop, the bank will definitely take notice. As a personal guarantor, "if he sold the debt to this new company, and the creditor doesn't know anything about it, he's still on the hook" for repayment, says Weldon.

You should also ask the bank about its credit reporting procedures. "In general, the debt could appear on both the personal or the business credit bureau report, depending on the terms and conditions of the account and how it is being reported by the credit grantor," says Torsten Gerwien, vice president of decision sciences at credit bureau Experian. That means the bank could be reporting the debt to your business credit report, leaving your personal report clear of the delinquency -- for now.     

Once the repayments stop, however, the bank will come after the personal guarantor using all the weapons at its disposal, including alerting the credit bureaus to the delinquency. This is when that unpaid account may show up on a personal credit report. The bank could even take the personal guarantor to court.

That all sounds pretty bad, but experts say getting worried or discouraged won't help. "I wouldn't ignore it; I would definitely start taking some proactive action," Yarmolich says, including closing the account to prevent any further charges by the new owners. If you remain liable as a personal guarantor, see if the bank will adjust the agreement's terms to make repayment easier on you. While repayment will be a pain in your wallet, it's a better option than being chased by a collection agency or helplessly watching your credit score plunge.    

This approach may sound like a chore, but it's more effective than simply hoping the unpaid business debt will just disappear.

Good luck!


See related: Business mistakes can appear on personal credit report, State statutes of limitation for credit card debt, 5 things you should know about business credit scores, How to cancel a credit card

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Updated: 11-24-2017