Will Business Debt Settlement Hurt My Credit Score?
Settling business debt for less than the full amount owed can negatively impact your business credit scores. However, the damage may be less severe than simply defaulting on the debt. Here’s what business owners need to know about how debt settlements affect credit.
How Business Credit Scores Work
Before diving into the credit score implications, it helps to understand what goes into business credit scores. The main business credit reporting agencies—Dun & Bradstreet, Experian Business, and Equifax Small Business—each have their own scoring models.While the details differ, all business credit scores generally assess:
- Payment history – Whether payments are made on time
- Amounts owed – Percentages of credit limits used
- Length of credit history – How long accounts have been open
- New credit applications – Number of recently opened accounts
- Public records and collections – Bankruptcies, tax liens, judgments
Payment history and debts in collection typically have the greatest impact on scores.
Business Debt Settlement Basics
Debt settlement involves negotiating to pay a lump sum that is less than the total balance owed. The remaining amount is essentially forgiven. Common business debts that get settled include:
- Business credit cards
- Equipment financing loans
- Commercial mortgages
- Business lines of credit
- Commercial auto loans
Settlements often occur when a business is facing financial hardship and cannot continue making monthly payments. A business may negotiate directly with creditors or work with a debt settlement company.
Debt Settlements and Payment History
With debt settlement, the account will become delinquent because the business stops making monthly payments per the original loan agreement. Overdue payments can stay on a business credit report for up to seven years.Even after negotiating a settlement, the late payments leading up to the settlement date will likely remain and negatively impact scores.
Debt Settlement and Amounts Owed
In addition to dinging payment history, settlements affect the amounts owed component in two key ways:
- Credit utilization may rise initially. If minimum payments stop while settlement talks occur, balances can creep higher compared to credit limits. Higher utilization tends to lower scores.
- Settled debt could still show on credit reports. Even after a settlement, the account may remain open and show the original loan amount. Creditors might also continue reporting settled debts for up to seven years with updated notations, such as “settled” or “paid less than agreed.”
Having large outstanding debts—even marked settled—can negatively impact credit.
Debt Settlement and Public Records
Defaulting on debts can lead creditors to pursue legal action. Common public records that may appear after default include:
- Tax liens
- Civil judgments
- Bankruptcy filings
These public records can devastate business credit scores. However, by proactively settling debt, businesses may avoid some public records.
Weighing Pros and Cons of Business Debt Settlement
Settling debt almost always damages credit to some degree. However, it may cause less long-term trouble than simply defaulting. Before deciding, weigh the key pros and cons:
Pros
- Resolve unmanageable debts for less than owed
- Avoid legal action in some cases
- Credit damage may be less severe than defaulting
Cons
- Accounts become delinquent
- Settled debts may still show for years
- Future financing could be harder to get
- Possible tax consequences on settled amounts
Projecting cash flow and credit impacts help determine if settlement makes sense. Speaking with a credit counselor could also provide an impartial perspective.
Strategies to Minimize Credit Damage
While some credit damage from settling seems inevitable, a few proactive steps could help minimize the fallout:
Keep communicating: Staying engaged with creditors before and after settlement helps ensure proper reporting. Make sure they don’t report debts as unpaid when settled.
Don’t close accounts: Consider keeping credit card and loan accounts open with $0 balances. Open accounts tend to help credit mix and history.
Hold off new applications: Applying for new financing right after settlement is unlikely to go well with battered credit. Give scores time to recover.
Consider business credit counseling: Non-profit counselors provide advice tailored to business credit and may negotiate settlements on a business’ behalf.
Rebuilding Business Credit After Settlement
With some diligence, businesses can bounce back after debt settlements. Primary tips for rebuilding include:
- Pay all current debts on time going forward
- Keep credit card balances low compared to limits
- Allow time for public records to fall off reports
- Limit new credit applications if possible
- Have factual errors on credit reports corrected
A business that develops solid payment habits and gives their credit profile time to heal may eventually qualify for financing again.
Turning to Delancey Street for Help
The attorneys and financial experts at Delancey Street have years of experience with business debt settlement and credit repair. We understand this can be an overwhelming process. Our dedicated advisors fully assess each business’ unique situation to create customized action plans. We negotiate settlements, assist with rebuilding credit, and position businesses for future success.To explore your options for resolving business debt, give us a call today at 212-210-1851 or contact us online. Our team is always happy to provide a free consultation and explain how we can help your business move forward.
