How Long Does Debt Settlement or Consolidation Stay on Your Business Credit Report?
The Basics of Business Credit Reports
First, let’s review some basics. Your business credit report is maintained by business credit bureaus like Experian Business and Dun & Bradstreet. It works similarly to personal credit reports and includes information like:
-- Your business identifying details (name, address, etc.)
- Public records like bankruptcies and tax liens
- Collection accounts
- Trade accounts like business loans and credit cards
When you apply for financing, lenders will review your business credit reports and scores to gauge your creditworthiness. So you want to keep your business credit in good shape.
How Long Do Collections Stay on Business Credit Reports?
If your business has unpaid debts that get turned over to collections, they can stay on your business credit reports for a long time. According to Experian, most negative information stays on your business credit report for up to 7 years. However, bankruptcies can stay on your report for 10 years.
So if you simply stop paying a business debt and it goes to collections, that could hurt your credit for 7 years. Debt settlement or consolidation could reduce the damage, which we’ll explain more below.
Understanding Debt Settlement
Debt settlement, also called debt relief or debt negotiation, is where you work with a settlement company to pay off debts for less than you owe. The process typically involves:
-- Stopping payments on the debts
- Allowing the accounts to go delinquent or even into default
- Negotiating with creditors to pay a percentage of what you owe (often 50% or less)
- Paying off the reduced balances through a debt settlement program
This can sometimes resolve business debts while saving you money. However, it also damages your business credit if the accounts become delinquent.
How Debt Settlement Affects Business Credit
When you stop paying a credit account, it eventually becomes seriously delinquent and often gets sent to collections. According to credit reporting rules, the original creditor can report a debt as “settled for less than full balance” once you pay through debt settlement.
The key things to know are:
- Settled accounts stay on your business credit reports for about 7 years from the date the debt first became delinquent. This is true even if you settle quickly.
- Having recent settled accounts or collections can seriously damage your credit scores. Expect your scores to drop by potentially 100 points or more.
- Settled accounts continue affecting your scores negatively until they fall off your reports after about 7 years. But they should hurt less over time.
So in terms of credit impact, debt settlement gives you a negative mark that stays on your business credit reports for around 7 years. But it hurts you less than simply letting an account stay unpaid with no resolution.
How Debt Consolidation Affects Business Credit
Debt consolidation works differently than settlement. With debt consolidation, you take out a new loan to pay off multiple debts at once. This combines the debts into one monthly payment.
-When it comes to your business credit, the impact of consolidation depends on how you handle the process:
- If you become delinquent on debts before consolidating, that still damages your credit.
- Paying off debts with a consolidation loan shows up as new loan tradeline. As long as you stay current on the payments, this can help your credit mix.
- Closing old credit accounts lowers your total available credit, which can initially lower your credit scores.
The key is that consolidation itself doesn’t necessarily need to hurt your credit. What matters most is that you stay current on the new consolidated loan.
Strategies to Improve Credit After Debt Settlement
There’s no instant fix for bad credit from debt settlement. But you can rebuild credit over time. Strategies include:
-- Stay current on all other business debts. Keep making on-time payments.
- Pay down balances on revolving credit accounts. This improves credit utilization ratios.
- Limit new credit applications until your scores start to recover.
- Consider adding new positive tradelines by taking out and repaying small business loans or credit cards.
- Contact creditors directly to negotiate goodwill removal of settled accounts after a period of good payment history.
With diligence and patience over time, your business can bounce back from the credit impacts of debt settlement or collections. But beware of fast fixes – there are no shortcuts when rebuilding damaged business credit.
When Debt Settlement Makes Sense for Your Business
Despite the credit impacts, debt settlement can still be a smart financial move at times. It lets you resolve unmanageable debts while paying only a fraction of what you owe. If you don’t have the cash flow to keep up with payments, settlement may be your most viable option.
Just go in with eyes wide open. Be ready for the 7+ years of damaged credit and plan for credit rebuilding over the long haul. Also research settlement companies thoroughly and watch out for scams. If considering settlement, get help from a reputable debt relief provider.
Alternatives to Debt Settlement
Other options like debt consolidation loans or credit counseling won’t hurt your credit scores as much as settlement. The National Federation for Credit Counseling offers free business credit counseling to help create debt management plans. Non-profit credit counselors work directly with your creditors.
The bottom line is debt settlement should really be a last resort. Try other options first if you want to protect your business credit standings as much as possible while working your way out of debt.
The Takeaway
Debt settlement or collections can seriously damage your business credit reports and scores. The negative marks stay on your credit reports for about 7 years. So while settlement resolves the debts, it causes long-term credit harm.
Before pursing settlement, understand the credit implications and explore alternatives like business debt consolidation loans or credit counseling. With patience and diligent financial management, you can rebuild credit over time after debt settlement. But be prepared for an uphill battle.