What should you do if your business is closed, but you still have a ton of business debt dragging you down?

A reader asked this question:

In desperation last year to keep a business afloat (and thinking that more money was the answer) I had my mom open some credit cards in the corporate name (using her personal guarantee) I REALLY believed that the money would be the answer and it would lead the business to prosperity and the ability to pay things back – but that’s not what happened…

I have since closed the business, but have been paying the credit card bills (about $1000 of monthly payments towards over 45k in credit) out of my personal salary with my new job. We are suffering tremendously to pay these bills and have just recently stopped paying some of our own bills because of not wanting to ruin my mother’s name!

Any options other than continuing to suffer to make these payments?

Dear reader,

It is devastating when a business fails, there is no doubt about it. Particularly if you are left with a large amount of debt. In your case, part of the debt is in a family member’s name, which makes it doubly difficult. The good news is, you have a ton of options. I’ll walk you through them, so that you can decide which ones will meet your needs.

Let’s start with your personal finances. You said that you are falling behind in your own bills so that you can pay your business debt, and protect your mother’s credit rating. That is definitely the right thing to do, but it is going to ruin your credit. Let’s see if we can get control of that first.

Step #1: The planning stage

Before you do anything else, make complete lists of what you owe, and who you owe it to. Do two lists – one list of your personal bills, and one list for your businesses’ bills that your mom guaranteed.
Include the following things for each account:

• The amount you owe
• The contact information for each lender
• Your current interest rates
• Any fees on the account
• Your account number.

Doing this will save you a TON of time in the long run. Also write down the name and operating number of any representative that you speak to when you call, as well as the date and time that you called them.

Step #2: Deal with your finances first

Cut back where you can, and raise your income by taking side jobs if you can. That said, you will need to set aside a block of time to call each of your own creditors. This includes your utility bills, as well as your credit card bills.

Since you are behind on some of your bills, you will need to be able to make some sort of a payment when you call to negotiate. When you are ready to do that, call everyone you owe, and ask them to do the following things:

• Remove any late fees
• Lower your interest rates
• Waive any yearly fees
• Make a payment plan – try to get them to temporarily reduce the amount that you have to pay each month, if you can. You can explain to them that you closed your business, you have a new job, and you are just going to need some time to get everything back up to speed. Be friendly, and polite. Do not close out any accounts – especially your credit cards, because this will lower your credit score. The good news is, since you are behind, your creditors are going to be more willing to negotiate with you.

**If your credit card company refuses to make a payment arrangement unless your account is closed, you will have to decide what is best for you. Closing the account will hurt your credit score, but probably not as much as several months of late payments (or non-payments) will hurt it. For more information on how credit scores work, you can check out this article.

Now if you call and you get absolutely nowhere (which sadly does happen…) call back and try this tactic with your credit card companies:

Tell them that you have found a wonderful balance transfer offer and you intend to balance transfer your debt unless they can match the rate. If the representative still will not help you, ask point blank to be transferred to the retention department.

The retention department exists to help the credit card company keep it’s customers. They are authorized to reduce your interest rates, and pretty much everything else, no questions asked.

I recommend that you not make a payment until they are willing to negotiate with you. Usually a week or more past due is enough. Obviously, don’t tank your credit score and go months past due! Use your own discretion here because this tactic will lower your credit score.

Before you use the balance transfer strategy, check out a few competing offers so that you can back up your claims with something like “Discover has a 0% balance transfer offer going on right now…”

If you make any sort of a payment arrangement, make sure you keep your end of the deal. Otherwise, you will see your interest rates skyrocket, your accounts closed and sent to collections, etc. You really, really want to avoid that if at all possible.

So, at the end of this stage, you will hopefully have lowered your interest rates, removed all of the fees on your accounts, set up reasonable payment plans with your own creditors, and hopefully your credit lines will remain open.

Taking the time to go through these steps for your own accounts will free up more money, and give you a better ability to negotiate the debt that is affecting your mother’s credit rating.

Negotiating the debt that your mother guaranteed:

This is a horse of a different color, and you will want to be careful. In the suggestions above, I have assumed that it is more important for you to get control of your finances than to protect your credit rating (going past due is the easiest way to get a company to work with you on payments, ditto for closing out accounts or balance transfers.) With your mother’s loans however, her credit rating is of the utmost importance. That means that you have far less leeway in your negotiations.

You have one excellent initial option:

Try the balance transfer strategy, and have any fees removed – Simply having your interest rates reduced, or fees removed will not impact her credit score at all. It is important that you do not mention that the business has been closed. That may be all the encouragement that the credit card companies need to close out the account. If they close the account, it could affect your mother’s credit score.

I do not know your entire financial picture, but I am hoping that negotiating your own accounts, and reducing the interest rates on hers will be enough to get you through. If it isn’t, you can try the strategies listed below. You also have the option of taking all of your accounts to a professional debt negotiator. (I will give you the details on that at the end of the article.)

The second best option for guaranteed accounts:

Have your mother check all three of her main credit reports. She can do this for free by visiting AnnualCreditReport.com.

You will need to know whether or not any of the business loans are being reported on her personal credit reports each month. If they are, handle those accounts with kid gloves because anything you do will affect her credit score.

Now, if the account shows up as open, but the payments and debt are not being reported, you might be able to do a little more negotiation and set up payment plans without hurting her credit score. Personally, I would handle those accounts one at a time, starting with the smallest line of credit that she guaranteed. If something goes wrong, a small line of credit being closed out will have less impact than a larger line of credit.

Basically you will want to repeat the same steps that you took with your personal debt with one exception: Do not go past due in order to negotiate the debt at any point. It is very likely that a late mark will show up on her credit report if you do. It will make negotiations more difficult, but it’s not impossible.

When you call those creditors, make sure you ask them what will happen if you negotiate a payment plan with them. A simple, “My mother is the personal guarantor on this account. I do not want to hurt her credit score. If I make a payment plan with you today, will that show up on her personal credit report?” should be enough.

I hate to tell you, but the average customer service representative will probably not know the answer to this question. You may need to speak with a manager, a manager’s manager, or even someone in the collections department to get an honest answer. Once you know the answer, you can proceed accordingly.

As far as your mom’s guaranteed loans go, avoid the following things:

• Closing out the account
• Being late
• Lump-sum settlements
• Payment arrangements that involve the account being reported as anything other than “paid as agreed” on your credit report. If you aren’t sure how the payment arrangements will be reported, make sure that you ask the rep or manager that helps you set everything up.

Now, if all of this is sounding like a headache and a half, don’t worry because you can get help.

Professional Debt Negotiation

Professional debt negotiators are experts in reducing debt to a manageable level. They can literally help you reduce your debt by as much as 40% – 70% of the initial total. That sounds wonderful at the outset, but you do need to understand that if you hire a professional debt negotiator, they will do both of the following things:

• Close your credit accounts
• Hold your payments until you are past due in order to gain leverage in the negotiations

Neither of those are really acceptable options where your mom’s debt is concerned. So – if you hire a professional, make sure that they understand this is part of the deal:

They must negotiate both of the following things as well as the total amount of your debt:

None of the accounts will show up as delinquent, or “settled” on your mother’s personal credit reports.

They must get something in writing from each creditor that says “If for some reason the debt does show up as settled, or anything other than “paid as agreed” on your mother’s credit report, they will not attempt to validate the debt when she challenges it on her credit reports.”

If the debt negotiator tells you that is not possible, try a different company. If three companies tell you that isn’t possible, consider using a debt negotiator for your personal debts if you need to, but avoid doing it for any loans that your mother guaranteed.

Other available options:

You can also consider consolidating all of your loans under a Home Equity Line of Credit (HELOC), if you own your home, and you do not already have a loan of this type.

If your credit hasn’t been too badly damaged, you really can consider balance transferring at least part of your debt to a card with better rates. You could especially consider transferring the loans that your mother guaranteed onto new cards that she has not guaranteed so that you can negotiate the debt as you see fit.

When it’s all said and done:

Clean up your credit report, and your mother’s, if needed. Under federal law, you have the right to challenge anything on your credit reports. If the companies that you owed money to do not validate the information within 30 days, it must be removed from your credit report. It’s a bit of a time-consuming process, and I’m sure you will want to help your mother do it if you end up needing to, but it is well worth the effort. Especially if she ends up with something negative on her credit report as a result of your negotiations. You can find complete instructions for challenging items on your credit report here.

I wish you all the best as you work through this situation. With time, effort, and perseverance you can get your debt resolved without damaging your mom’s good credit score. Please feel free to come back if you have additional questions, we’re happy to help.