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. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes “Your Business Credit,” a weekly column about small business and credit, for CreditCards.com.
I want to buy a house. What should I do about my business credit card debt I can’t pay?
You are personally liable for credit card debt incurred when you owned a business, even if your business closed. If your debt remains unpaid, you either won’t qualify for a mortgage or you’ll get a high interest rate, which will financially impact you for years to come.
Dear Your Business Credit,
I had a business for seven years. In 2014, I closed my business because I was pregnant with complications. I had opened a line of credit in 2013 for $15,000 for equipment, not knowing I was going to lose my business. My bad credit was reported in 2014 to a debt collector and then sold off to another debt collector and so on. Does the seven years start from when it was first reported? Also the loan was not in the business’s name but in my name.
I don’t have the full amount to pay but maybe $4,000. I also have other credit debt totaling close to $26,000. That does not include my student loan, for which I don’t pay anything for one year. I have no assets, nothing in my name at this time. I want to buy a home and am not sure what would be best … filing bankruptcy or negotiating my debt. Please help! – Jennifer
It can be very hard to rebuild financially after a health-related crisis, especially one that makes it impossible to work.
Unfortunately, it sounds as if you personally guaranteed the line of credit. If so, you are responsible for paying it back.
The seven years start when a charge-off is first reported to a credit bureau. For collections reported by a collection agency, it is 7.5 years from the date the debt first became late. For more detail on this, check out my colleague Barry Paperno’s article, “Don’t expect big score boost when unpaid debt falls off credit report.”
Contact an attorney
In your situation, I would look for an attorney in your state who specializes in credit- and bankruptcy-related issues. Seek advice specific to your situation.
Some attorneys will take pro-bono cases or operate on a sliding scale, based on income. If you can’t find someone at an affordable rate, contact Legal Aid in your area. A knowledgeable attorney can help you assess your situation objectively and potentially help you negotiate a settlement of the $15,000 debt to a level you can pay.
You didn’t mention whether you are working now or have another source of income, such as a spouse or life partner’s salary, but that is relevant in determining if you can actually work out a payment plan you can afford. An attorney will help you take those things into account.
Put off buying a home
It’s a wonderful idea to buy a home – one day. Now doesn’t sound like the time to try to do it.
For one thing, you have damaged credit. That will make it hard to get a mortgage. Even if you do get a home loan, it likely will be at a high interest rate. Overpaying for a mortgage can have financial repercussions lasting for decades.
The fact that you have no assets at the moment doesn’t bode well for immediate home ownership, either. It will be hard to save for a down payment and maintain a house with no financial reserves and a lot of debt.
There are always unpredictable expenses that come with home ownership – a refrigerator breaks down at the worst possible moment, the roof springs a leak or the basement floods. You can’t not deal financially with these home-related problems, and it doesn’t sound as if you have much room on your credit cards for emergency expenses.
Once you have your debt situation under control, work out a budget that lets you start saving for a down payment on a house. That might require some lifestyle changes.
For instance, if you’re not working at the moment, perhaps you will need to start another business or get a part-time job to bring in the money to save for a home.
Your financial situation isn’t an easy one, but with the right help and planning – and some patience – you can turn it around and start planning for that home you will buy one day. Good luck!
Tip: Once you have your debt situation under control, work out a budget that lets you save for a down payment on a house.