Dear Your Business Credit,
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I am employed by my own small business. It is failing, and I may just have to shut the doors. It is a child care. I own (or used to) the building appraised for $575,000. I borrowed $71,000 on seven credit cards to keep the business going. I will now walk away from the business owing $130,000. If I can keep two credit cards current, but default on the other five, what happens to the two I keep? Will they close my account? One is an American Express that I have had since 1984. Please advise and thank you so much!
I am sorry to hear about the challenges you're facing.
To answer your question, I spoke with Richard Fine, a lawyer in Houston, for advice. Typically, he says, if you default on some of your credit cards, the other card issuers will notice this on your credit report and may lower your credit limit -- sometimes dramatically. "All of a sudden, your $10,000 credit limit is suddenly $500," he says, as an example.
If you stay current on paying the two cards you want to keep open, the card issuers may not have much of an incentive to terminate your accounts. However, there is a chance that the issuers of these two cards will close your accounts, too. "They have a right to shut them down," he says. Practices vary among the card issuers, according to Fine, so it is hard to predict exactly what will happen in your situation.
You didn't mention whether you are filing for bankruptcy protection. If you are and have balances on the two cards, you might consider including them in your bankruptcy case so you can get the debts discharged, he suggests. In any case, you may not have much choice about keeping them open. In a bankruptcy, the issuers would probably shut them down, he says.
If you still own the commercial building you mentioned, it is likely to be considered an asset that can be used to pay off your debts in bankruptcy court, Fine says. Bankruptcy laws vary from state to state, so it would be smart to get advice from a pro bono lawyer who is familiar with the laws of your state (for advice on how to find one, see "Finding a free bankruptcy attorney for business, consumer debt."
Before you turn to bankruptcy, however, I would consider whether there are ways to attract more business to your childcare center and get your debt payments under control. I have interviewed thousands of entrepreneurs over the years, many of whom have found inspiration for turning around their businesses when facing situations like yours. It could be that if you market your business better, you will attract the revenue you need to stay afloat.
Instead of trying to save the business in isolation, get some advice from experts. Nonprofit microlenders often help entrepreneurs who own daycare businesses. It might be worthwhile to talk with some of the microlenders in your area to see if they can advise you and perhaps introduce you to some refinancing options that will lower the monthly payments on your debts. The nonprofit microlender Accion has a presence across the country and provides extensive help for entrepreneurs. Your district office of the U.S. Small Business Administration can also direct you to microlenders in your area. The SBA has district offices throughout the country; the one near you may be able to help. You have put so many of your personal resources into this business that it is worth getting some help to save it.
It's also important to do everything you can to protect your credit rating -- especially if the child care business does fail and you need to apply for a job. Some employers request to look at job applicants' credit reports before hiring them.
Entrepreneurs tend to be natural risk takers, but in today's economy, it's important to be a little more cautious than in the past. Many entrepreneurs are realizing this. A spring 2013 survey by The Hartford insurance company found that a whopping 80 percent of small business owners rated themselves as "conservative" when it comes to taking risks with their companies, compared to 49 percent in the spring of 2012. While you don't want to overly cautious, it's important to consider the long-term impact of any debts you take on, so they don't come back to haunt you. There could be other means of financing that are just as effective, without the risk that comes with building up a lot of credit card debt.