Am I liable for my business' corporate card debt?
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Dear Your Business Credit,
Am I liable as a credit card holder for a corporate credit card account? According to the National Banking Act, the home state of the issuer is the appropriate law, in this case Virginia. -- Del
You didn't mention if you are the owner of the company but I'm going to assume that you are. If you obtained a traditional small-business card for your company, chances are you were asked to personally guarantee the card or agreed to "joint and several liability," meaning you would share liability with the corporation.
Credit card companies make it hard for small-business owners to avoid responsibility for their debts in a business. They do not want to be caught short in a situation where someone puts a corporation into bankruptcy -- but still has plenty of personal assets and is just trying to escape a debt, says Robert Brennan, an attorney at SoCalCreditDamage.com, in La Crescenta, California.
The best way to find out where you stand is to read the fine print of the paperwork you signed when you got the card. "The answer depends on the agreement you signed with the credit card issuer," Brennan says.
Now for a little good news: There are some cases in which you might not be responsible for the debt. Some larger small businesses obtain the type of corporate card that a big company gets. These cards often come with "commercial liability," meaning the company is responsible for the debts. You signed paperwork at the time you got the card, and you need to look back at what you signed.
If my assumption that you are an owner is not correct, and you do happen to be an employee, you may also be free of liability. "If this is a situation where an employee is an authorized user -- but not a primary account obligor on the card -- then the employee is not liable, unless the employee has signed on to be personally liable for the card," Brennan says.
Your letter is a good reminder of why it's important for owners to read the fine print when shopping for a small-business credit card. It is possible to find one that doesn't require a personal guarantee, though they are hard for small businesses to get, as I discussed in my recent column, "Will an ITN help me get a business card without a personal guarantee?"
To head off crushing debt, be conservative in using business credit cards. Credit cards are an excellent tool to maximize your cash flow as you grow your business, but they can tempt an optimistic entrepreneur to overspend in the name of growing a business.
If you have to give a personal guarantee, never borrow more than you can afford to pay back personally. Find other ways to fund your growth, such as tapping cash flow. Otherwise, you could find yourself in a situation down the road where you have to file for personal bankruptcy to get out from under insurmountable bills.
What if you're already facing a situation like this? Then pick up the phone and call an attorney who specializes in credit and bankruptcy for guidance. A lawyer with a strong track record may be able to help you negotiate with your creditors more effectively than you can do on your own.
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