Can Debt Collectors Come for Business Debt?

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.