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Nearly every small business owner uses borrowed money or credit to one extent or another. It can be critical to keeping your company open and providing future opportunities. As you know, this comes with strings attached, which can vary depending on state laws and the type of financing you use. Here are some rights your creditors may have and how they impact you and your business.
What Are Creditor’s Rights?
Creditors’ rights are the legal protections and remedies possessed by lenders or entities that lend money to individuals or businesses. They allow creditors to collect their outstanding debts and take legal action when necessary. Those rights can include the following:
- Lien rights: A creditor could place a lien on your assets (real estate, equipment, or accounts receivable) to secure repayment
- Repossession: If you default on a secured loan, the creditor may have the right to repossess the property or asset you used as collateral to secure the loan
- Garnishment: A court may permit a creditor to take a percentage of your pay or take the amount due from one of your bank accounts
- Filing lawsuits: Creditors can sue you to obtain a judgment against you. This may lead to asset seizure or garnishment
- Bankruptcy claims: If you file for bankruptcy, creditors have the right to try to prevent bankruptcy protection, and if you receive it, recover at least some of what you owe
Read any contract with a creditor carefully to learn their rights. Speak with your Irvine, CA mergers and acquisitions lawyer so you fully understand the terms you’re agreeing to and how they’ll affect you.
How Do Creditor’s Rights Affect A Small Business Owner?
Money and credit aren’t just handed out. Lending is a business, and they have rights that protect their interests. Creditor’s rights can have a significant impact on a small business owner in several ways, including the following:
- Personal Liability: If you personally guarantee a loan or own your business through an entity that allows personal liability for debts (like a sole proprietorship or partnership), creditors can pursue your personal assets (home, savings) if your business defaults
- Business Operations: If a creditor garnishes business accounts or enforces a lien, it may impact your cash flow and operations
- Credit Impact: Unpaid debts and legal actions to collect them can harm your business’ credit rating, making future financing more difficult to obtain and at higher interest rates
- Risk of Bankruptcy: If you can’t handle repaying your debts, your business’ best option may be bankruptcy, which could cause liquidation or restructuring
If you’re having difficulty paying your debts, speak to your attorney to discuss your options. You may be able to renegotiate the terms so payments become more affordable. If the situation is bad enough, bankruptcy may be the right choice for you and your business. Don’t wait—reach out to Focus Law LA today and let us help you navigate your legal challenges.
