Long after business is sold, old card debt arises

Debt collector is calling; key is to find old contract

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 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

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Question Dear Your Business Credit,
I sold a small retail business in 1996 that I had owned for about three years. Just now, I am suddenly being hassled by an apparent debt collector because the person I sold [the business] to sold it to someone else and did not pay off the business credit card balance that he, not I, had run up after he bought the business.

The last owner dissolved the business in about 1999. I apparently signed as guarantor on the credit card when I bought the business in 1993 and did not close the account and neglected to remove myself as the guarantor when I sold the business. To make matters worse, the credit card company itself has been sold out this year, and I don't even know the old account number nor whom to contact. Any suggestions? -- Ron

Answer Dear Ron,
Don't throw up your hands and give up!

I spoke with a couple of attorneys to get their take on what you can do. Fortunately, it looks like you have a good shot at avoiding payment on this debt, but you have to do some homework. Especially if this is a substantial debt, I would strongly suggest you get advice from an attorney in your state with experience in debt and bankruptcy.

Your first step should be to determine what your contractual obligations really are. Find any correspondence and documents you have regarding the credit card you took out and your agreement to sell the business.

Review the documents you signed with the attorney. "The first area of inquiry would be the prior business owner's contract with the credit card company," says Todd A. Spodek, managing partner at Spodek Law Group P.C. "Did he have it in his personal name, was it a business credit card he personally guaranteed or a credit card without a personal guarantee?"

It is possible, he says, that you entered into a contract with the old owner with the assumption that you would pay off some of the business credit card debt -- but that there was no indemnification clause spelling this out. In that case, the original owner may still be legally responsible for the debt. A lawyer's expertise will help you correctly interpret the contract you signed.

However, even if there was a clause saying you were assuming responsibility for the debt, it is possible the statute of limitations to collect the debt in your state has expired, says attorney Steven Weiss, of Shatz, Schwartz and Fentin PC in Springfield, Massachusetts, who specializes in commercial and consumer bankruptcy. "Just because they have a computer printout, it doesn't mean that's what goes," he says. Ask your attorney to look into this.

And even if the statute of limitations has not passed, don't take the collection agency's word for it that the debt was properly assigned to it. Spodek recommends you send a debt validation letter. Under the Fair Debt Collection Practices Act, the debt collector must send you written validation of a debt within five days of contacting you. If they haven't done so, you may send them a letter requesting validation of the debt. CreditCards.com has published a sample letter you can use as a model. "While that is happening they are not allowed to report it to any of the three major credit bureaus," says Spodek.

If the collection agency does not produce the proof, then the debt should cleared from your credit report after 30 days, says Spodek. If the company does validate the debt, you will have 30 days to investigate and then will have to deal with the debt.

Should you find that you are obligated to pay the debt, Spodek suggests you attempt to negotiate for pennies on the dollar, given the age of the debts and the various assignments of it. He also suggests requesting a copy of your credit report and seeing how the debt has affected it, if at all. You may have to do some credit repair. But looking at the positive side of things, you'll finally know where you stand and will be able to move on.

See related: Co-owner's personal bankruptcy clouds your business credit, New business shouldn't inherit partner's old debt, Am I liable for business debt my partner hid?

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Updated: 01-23-2018