Small-business options for dealing with supplier debt

Your Business Credit columnist Elaine Pofeldt
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, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

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Question Dear Your Business Credit,
I own a small business. I started a line of credit as general partner and took off the general partner and got a new EIN when the general partnership dissolved. I am now an LLC under a third new EIN.

A vendor messed up, didn't want to resolve an issue and now has a lawyer involved. I have had disabling health issues the past few years. If I gave away the business or shut it down, and go back on disability, can they still put a lien on my house or go after the money in any other way? -- Dawn

Answer Dear Dawn,
I am sorry to hear about your health issues and the debt you are dealing with. It does seem there is a way out of your debt, but that route is probably not by going on disability.

Based on your note, it appears you are being sued by a supplier or threatened with a lawsuit. Because your situation is complicated, I would highly recommend you speak with an attorney in your state who specializes in debt and bankruptcy or, if you cannot afford it, seek help through The Legal Aid Society. Knowing where you stand will give you peace of mind and very likely save you money in the long run.

Since we are talking about a vendor, you may not have signed a personal guarantee making you liable to pay the debt, the way you might with a credit card company. I'd suggest you look back at any past records to see what you actually signed.

The type of business entity you ran at the time you incurred the debt to the vendor is also important. It is unclear to me from your note what type of business entity you were running at the time.

Let's assume you incurred the debt in your current LLC. In an LLC, if you have not personally guaranteed the debt, then the vendor should not be able to sue you for it, says attorney Jeffrey Herrmann, a managing partner with Cohn Lifland Pearlman Herrmann & Knopf LLP in Saddle Brook, New Jersey. The same would hold true if you had formed a corporation, rather than an LLC. "If you run ABC Inc. and you bought $100,000 worth of a product and you didn't have the money to pay for it, while your company can be sued, you generally speaking can't be," he says.

However, you would generally be liable for such a debt if you had not incorporated. So, if you incurred the debt while still in the earlier general partnership you mentioned, it is possible you are liable.

"The key is the document creating the credit arrangement," Herrmann said. "If the original contract was with a general partnership, then there will be a personal obligation throughout the course of dealing unless, after forming an LLC, the owner revokes the old contract and has the LLC enter into a new one."

It would be a good idea to look at the contract you signed with a lawyer so you also understand exactly what it allows the vendor to do. "Does the vendor have a lien on any assets pursuant to any contract between the parties by law?" asks Robbin Itkin, bankruptcy attorney and chair of the Business Solutions and Financial Restructuring Group at Liner LLP, who is based in Los Angeles . "That would be important."

Going on disability has no impact on your obligation to pay the debt, legally speaking, Hermann says. "Assuming you are liable and gave a personal guarantee, you can be sued. That you may have a disability is irrelevant," he says. While disability income usually is safe from garnishment, as I discussed in a previous column ("Disability income may be safe from business-debt collectors"), if you personally guaranteed the debt, a creditor can potentially go after your other assets.

You could potentially get out of your obligation to pay the debt by giving away the business or selling it. However, to pass along responsibility for the debt, you'd have to negotiate a written agreement for the new owner to assume responsibility for it. "You could make a deal that you would essentially convey your interest and that person would indemnify you," Hermann says.

If the business includes real estate, you could also potentially give the real estate to the vendor to pay the debt. "That happens all the time with real property," says Itkin. You would want to make sure if you did this that the contract says that if any debt is satisfied, there are no further obligations, and you are released, she adds.

But before you do that, you should look at some other important issues with an attorney, according to Itkin. Another key factor is how old the debt is. It is possible that the statute of limitations to collect on it has passed, says Itkin.

And if you do owe the debt, look into how much your business and its assets and inventory are worth, before you close it, she says. "Maybe, rather than close it up, there is some value to sell it to a third party and use that money to help pay the creditor," Itkin says.

If you truly can't pay the debt, then you may have to consider other options, such as bankruptcy. But you may not have to go that route. "There are ways of resolving this out of court with payment plans," says Itkin. A good lawyer will help you choose the best option for you.

See related: Get that debt deal agreement in writing, Help! Our supplier is trying to change our payment terms, Finding a free bankruptcy lawyer for business, consumer debt

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Updated: 12-14-2017