Home > Managing Debt > Can a Debt Collector Come After Me for a Business Debt?

Comments 0 Comments

We sometimes hear from readers who want to know if it’s legal for a debt collector to come after their personal accounts (or possessions) because of a business debt. They’ve taken on debt to start a business, and then things haven’t gone as planned. And now a debt collector is threatening to come after their home or property. Is it a scare tactic, or can they really do that?

Their questions can be summed up this way: If my business can’t pay creditors, are my personal accounts at risk? (After all, “business is business” and not personal, right?) The U.S. has a long and proud history of entrepreneurship — and small businesses are crucial to the economy. And, without optimism behind starting a new business, nobody would take out a business loan with a personal guarantee — which is often essential when it comes time to secure one.

Guaranteed By You, for You

A personal guarantee allows a lender to try to collect from what you own personally if you default on a loan and your business is unable to repay it. It allows a lender to reach beyond the income and assets of the business to collect if necessary.

Given personal guarantees, some business debts really can put your personal accounts at risk, says Credit.com contributor Michael Bovee, the creator of the Consumer Recovery Network and a 20-year veteran of the debt and credit industry. Although many people wisely look to protect themselves with a corporate structure or LLC, sole proprietors and DBAs (doing business as, such as “John Doe Plumbing”) do not, Bovee said.

Often, these small businesses and sole proprietors can’t get credit without giving a personal guarantee. “And if you personally guaranteed the debt, they can sue you personally,” he said.

Plus, regardless of the structure, “opening up a [business] credit card can put the person on the hook for the bill,” Bovee said. Worse, business credit card accounts do not have the same consumer protections as personal credit cards, he said.

So what can you do? Bovee said there are ways to reduce your risk. Among them:

  • Check into loans from the Small Business Administration. Bovee said you may still have to give a personal guarantee, but there are provisions for settling debts and for reduced payments on these loans in some cases, and that can be a huge benefit. In addition, they may offer slightly lower interest rates.
  • Use your personal line of credit. If, for example, you run a freelance business, you may choose to designate one of your personal cards as one you use solely for business expenses. This simplifies record-keeping for you, and the card may have consumer protections that business credit cards do not. (Plus, you may be earning rewards for yourself.)
  • Don’t forget about your original guarantee. If you open a business, sign for a credit line, pay your bills faithfully for years, and then leave the business and sometime down the line the business does not pay its bills, the personal guarantor may well be on the hook. So if you leave a business, make sure your personal guarantee leaves with you, Bovee said.

However you borrow, understand that the protections you enjoy as a consumer do not necessarily apply to a business. The Fair Debt Collections Practices Act, for example, does not apply. (Bovee said he’s aware of collectors who have told “blatant lies, and stepped over collection lines” but that may not be a violation of the FDCPA when it comes to businesses.)

And, although a business loan you personally guaranteed years ago had never appeared on your credit report before, if the business folds and the loan defaults, it could pop up on your consumer credit report, tanking your credit score, Bovee said. “No consumer protections, but now it’s on your consumer credit report,” he said. (You can see how a business debt may be affecting your credit by pulling your free annual credit reports on AnnualCreditReport.com or viewing your free credit scores each month on Credit.com.)

Knowing that you could be on the hook may be useful in determining whether borrowing more on the hope that the business is about to turn around is worth the personal risk to you — far worse to find out that your home, property and savings were on the line after the fact.

More on Managing Debt:

Image: vasakna

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team