If you can no longer make the minimum payments on your business credit cards, there are several different routes you can take. Some of them will damage your credit score, but there’s one that can get you back on the road to recovery.
Dear Keeping Score,
I am carrying business credit card balances for three different businesses. Two of them are LLCs and do not show on my personal credit. I have been using autopay to pay the minimums on these so as to not default.
I am now at a stage where I cannot afford to continue paying down those balances. My income has dwindled. My credit rating is still intact, but I cannot afford to take a consolidation loan at a better percentage because I will not be able to afford the monthly payments.
The only thing I can think of is disconnecting the autopay. This will leave those credit card accounts in default. I would welcome any suggestions and thank you. – Michael
Here is the big question to answer first: are your business credit cards guaranteed by you or anyone else? In my experience, it is very rare for a small-business owner to qualify for a business credit card without being personally liable in the event of a default. Now it’s not impossible, but it sure is rare.
Typically, you would need to have an established business with a solid history and a high business credit score. Yes, there is a business credit score out there. It typically runs between 1 and 100, with the higher end being the best place to be. There are four main suppliers of a business score: Dun and Bradstreet-Paydex, Experian, Equifax and FICO Small Business Scoring Service.
It’s also possible that your bank might have waived the personal guarantee if you have a long and profitable history with them. So, first off, get out your agreements and read the fine print.
Just because the two LLC business cards don’t report positive payments to the credit bureau doesn’t mean you aren’t responsible for the debt. Some LLC business card issuers only report negative activity to your personal credit file.
Since you are up to date on your payments, the lack of reporting is not a big surprise. The card that is showing on your personal credit makes me think you knowingly agreed to be liable for this card and subsequent debt. If you guaranteed the cards owned by the LLC, you are still liable for the debts. The LLC status protects you from liability suits, but not from a debt you also personally guaranteed.
See related: Defaulting on some of your cards risks losing them all
5 options for dealing with your business credit card debt
I’m going to answer your question assuming that you are liable for all the debts whether you know it or not. If I’m wrong, and you haven’t guaranteed anything, then just confirm with your lawyer that you are off the hook and have a nice day.
So, the bottom line is that this is debt that you owe, business debt or not. And you do have choices. These may not be the choices you like, but there are always choices.
1. Quit paying on the accounts
Even though this is a “do nothing” kind of approach, it is still a choice. But you may not like the outcome since it does nothing to solve your problem. In fact, it is likely to cause more problems in the form of creditor calls and then likely collector calls (which will be worse).
While you certainly have protections from the Fair Debt Collection Practices Act and the Consumer Financial Protection Bureau against harassment, companies do have the right to pursue you for payment that they are rightfully due. This pursuit can continue right up to being sued in court, having a judgment rendered against you and maybe wage garnishment if you let it get that far.
2. Reconsider a consolidation loan
It might be worthwhile to go over your finances with a fine-tooth comb and see if you can make some adjustments to allow for those payments over a longer period of time and at a lower interest rate. You might also check at a credit union if you haven’t; its terms may be better than a commercial bank’s.
See related: How business cards affect your personal credit
3. Contact your creditors and see if you can come to settlement or agreement on these accounts
A settlement would likely require you to come up with a chunk of cash through selling off some assets or something along those lines.
Many creditors have what are known as hardship programs. A hardship program would typically entail a temporary payment agreement which would require more affordable monthly payments and a reduced interest percentage rate for six months to a year.
While none of the choices you have are to be entered into lightly, this is one in particular that you must be very careful about. If the terms you are offered are not what you can keep up with, don’t go there. Your creditors will not take kindly to your reneging on terms that you agreed to after they, in their view, bent over backward for you and likely cost themselves some revenue.
This is my least favorite option, of course, but bankruptcy exists in this country for good reasons. You may be at the point of no return now, but only a qualified bankruptcy attorney can tell you if this option will work for you and is in your best interest. This will involve some cost to you, it is true, but depending on the circumstances you may be able to erase the credit card debt.
Of course, as a byproduct you will also severely damage your credit score for the next two or three years. Although the bankruptcy will stay on your record for 10 years, its impact on your score will diminish after a few years.
The impact of a bankruptcy on any loans that need underwriting (like future business loans or a mortgage) may continue for much longer. It may also make finding a new job more difficult when a prospective employer pulls your credit history, which most do.
See related: Business at risk in personal bankruptcy
5. Contact a nonprofit credit counseling agency for help
A certified counselor will work with you to help you find a solution that you can live with. They will go over all of these options in detail with you after they have completed a thorough financial assessment. Best of all, this initial assessment will cost you nothing.
You may find that you are eligible for a debt management plan, which would pay off your debt at reduced interest rates in five years or less. There is a charge for a DMP, but the cost savings usually more than make up for these fees. This would be much like a consolidation loan, so you may find that you cannot take advantage of a DMP.
If in the end the decision is made to file for bankruptcy, you will be one step ahead of the game because getting credit counseling is a condition of bankruptcy. My suggestion is to contact the National Foundation for Credit Counseling. These are all good guys who genuinely want to help consumers who are struggling, just like you.
Some of these options will hurt your credit score
I would be remiss if I did not remind you that a few of these options are likely to have a negative effect on your credit score. Getting help from a credit counselor and entering a debt management plan will have no effect, but a missed payment, a bankruptcy or debt settlement will hurt badly.
You say right now it is still intact, but you need to understand that this will not continue if you can’t or don’t make your payments as agreed.
Lastly, whatever course of action you take and no matter how much it damages your score, this is not a forever problem. It will pass either as a result of time or hard work or both.
I wish you good luck.
Remember to keep track of your score!