Wednesday, December 14, 2011

When Business and Personal Credit Collide

by John Ulzheimer



When I sat down to write this article I considered several titles; Not All Plastic is Created Equal, Don’t Take it Personally, Swiping Your Way Into Chapter 7, and several others that aren’t worth mentioning.  I chose the one with the word “Collide” because that’s how many small business owners feel when they make the mistake of mismanaging their small business credit card accounts.


What many small business owners don’t realize is that when they apply for small business credit cards they are really applying for personal credit cards.  The difference is that the business card has your company’s name emblazoned across the front, which is structurally meaningless.  This gives the impression that the card’s liability is assigned solely to the business.  Nothing could be further from the truth.
When you applied for your small business card, sometimes called a commercial card, you filled out an application.  And, within that application is what’s referred to as a “PG” or personal guarantee.  What those two words mean is that you, not the business, are on the hook for the payment of any debts incurred on that card, regardless of who incurs them.


As a general practice most small business credit card issuers do not proactively report your account activity to the three national consumer credit reporting agencies, Equifax, Experian and TransUnion, as long as the account is in good standing.  There are, of course, always exceptions to this rule and the only way to truly confirm if your small business debts are bleeding over into your personal credit reports is to check them periodically, which you can do for free at www.annualcreditreport.com.   


What is almost a certainty is if you default on your business credit cards issued by a lender with whom you’ve signed a personal guarantee, the record of default will be reported to your personal credit reports in the amount of time it takes to boil an egg.  When this happens the defaulted debt then comports with all of the rules that govern the reporting of personal debt to a consumer credit-reporting agency.  Most notably, the reporting of the defaulted debt will remain on your personal credit reports for seven years from the date of the terminal delinquency, which is normally the date the lender wrote off the debt as “uncollectable.”


At this point the negative credit reporting will have a serious impact on your personal credit scores, unless your personal credit is already in the dumps because of other unrelated defaults.  This means lower credit scores, and right now isn’t the time to have lower scores because lenders, both personal and business, have tightened their lending standards in reaction to both economic and legislative changes.  Credit scoring systems, while amazingly sophisticated, are not designed to exclude small business debts.  Point being, if they’re on your personal credit reports they’re fair game to any and all credit scoring systems.
To make matters worse, the collection efforts of the spurned lenders are also going to be reflected on your personal credit reports.  Generally lenders will first attempt to collect defaulted debts internally, usually with staff collection personnel.  If this proves unsuccessful then their next step would be to enlist the assistance of a 3rd party debt collector.  The lender would either sell them debt or consign them responsibility of collecting the debt in exchange for a share of recovered monies.  Under either circumstance a record of the collection activity would also be reported to the consumer credit reporting agencies.

If collection agency or debt buyer efforts are still unsuccessful then their next step could be litigation.  Collection attorneys have become very aggressive in their efforts to collect defaulted credit card debt and while you can ignore phone calls and collection letters, it’s hard to ignore a process server who is delivering a lawsuit complaint.  In fact, if you do choose to ignore the lawsuit you’ll lose by default and the lender will now have what’s referred to as a default judgment against you.

The default judgment, which is also likely to end up on your personal credit reports, gives the Plaintiff the ability to pursue what’s referred to as a garnishment.  Under garnishment the Plaintiff can ask the court to order deductions from your wages until the entire debt has been paid.  This, of course, assumes that you’re gamefully employed.
See what I mean about using the word “Collide” in the title?
© enloop, Inc.

3 comments:

  1. Here give a nice post. Spurned the efforts of lenders will also be reflected in your credit report. General lending institutions will first try to collect the internal debt default, usually with the staff collectors. If this proves unsuccessful, then they will fight the next step of third-party debt collectors assistance.


    Wage Garnishments


    Wage Garnishments

    ReplyDelete
  2. Thank You Durwin for your insight. -MBE Magazine

    ReplyDelete
  3. I am really lucky to read your good post on credit card. Using a credit card is easy but we need to learn how to manage them very well.

    conveyancing solicitors

    ReplyDelete