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Small Business Debt Effect on My Credit Score

The debts for my small business went to collections. Will my personal credit score be affected?

I have a small business, and unfortunately I have encountered debts that were sent to a collection agency. Can they go after my business and myself personally? I have explained my hardship with this economy, and would like to set up a payment plan to pay them off. Will my credit still be affected by this? And, if so, what is the upside on paying this debt?

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My answer assumes your business was organized as a sole proprietorship. I reach this conclusion because your question does not mention any business partners, which would imply your business was organized as a partnership. If you had organized your business as a corporation the attorney who set up the corporation would have explained that corporate officers and stockholders enjoy limited liability when a corporation is organized and financed properly. There are also variations on partnerships and corporations that combine the characteristics of both, but those are irrelevant for the purposes of this question.

In a sole proprietorship, all profits, loss, equity, and liability are assumed by the proprietor. When the business makes money, it's the proprietor's. When the business loses money, it comes from the proprietor's pocket. When the business takes on a debt, it may be in the name of the business, but ultimately the debt is the proprietor's liability.

In other words, if my limited powers of deduction are accurate, then the news for you is all bad. Yes, the creditors can sue you personally if the debt in your business' name goes unpaid, and if they do so they will be successful.

The credit report question is less clear and depends how the debt is recorded on the creditor's books. If the debt is in your business' name, and the debt goes unpaid, initially this will have no impact on you personally. Notice I used the word "initially." In time, as the creditors discover you are the proprietor and are responsible for the debt, then you can expect to see your credit score degrade. However, if the business debt is in your name and it goes unpaid, then your credit score will suffer immediately.

The up- and down-side to paying and not paying your business' debt should be clear from the above analysis.

To learn more about your credit score, see the Bills.com credit score and information page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/

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  • RW
    Mar, 2012
    Rachelle
    Columbia, SC
    My husband pastored a church from 1999 to 2009. During that time, the church applied for a business credit card for use to purchase items for the church and for use while he was traveling. Every month, the bill was paid by the church, unless my husband purchased something of a personal nature, at which time, he paid the church out of personal funds, which were then used to pay the bill. In November of 2009, he resigned from the church and we moved out of state. The credit card was relinquished to the church. He never applied for, signed an agreement or had any fiduciary involvement, he was simply an authorized user. Apparently, after he left, the church stopped paying the bill. We started receiveing collection calls in Nov 2010 and the delinquency was subsequently reported on my husband's personal account. We can't understand how this occured when he never provided his SSN or filled out an application. The church simply gave him a card to use during employment. Obviosuly, this now has seriously affected his credit rating, however, we cannot seem to get it off of the report. When we disputed with the CBs, it came back as verified, with a note that although it is a business credit card he is personally liable. Is there any way to get this off of his report? The debt is with Capital one and apparently they started reporting on personal accounts in October 2009 and notification went out. However, we never received notification and the card was relinquished back to the church in August of 2009, because it had expired. He never got a new card. Please advise the couse of action we should take.
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    • BA
      Mar, 2012
      Bill
      For consumer credit cards, authorized users have no liability for any unpaid balance on the account. I do not know if the same rule applies for business credit cards.

      The problem starts, and I believe ends, back at the church. I know many churches suffered financially when the recession took hold in 2009, but the church has had three years to get its house in order and pay its debts. Your husband should contact the finance committee at the church and explain the situation.

      If the church does not do the right thing, then your husband's only options are to either pay the debt and move on, or file a lawsuit against the church for the damages it has caused him.
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