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How Will Business Debt Settlement Affect My Credit Score?

If your business is struggling with debt, you may be considering debt settlement as an option. Debt settlement involves negotiating with creditors to pay a lump sum that is less than the full amount owed in exchange for the creditor agreeing to consider the debt settled.

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While debt settlement may help resolve business debts, it can also negatively impact your business credit scores. Here’s an overview of how business debt settlement works and the potential credit consequences to be aware of.

What is Business Debt Settlement?

With business debt settlement, a creditor agrees to accept a lump sum payment that is less than the full balance owed in order to settle the account. For example, if your business owes $100,000 to a creditor, you may be able to negotiate a settlement where the creditor accepts a one-time payment of $60,000 and considers the debt resolved.

Business debt settlement negotiations are often handled by a third-party debt settlement company. These companies charge fees but can facilitate negotiations and settlements with creditors. You may also try negotiating debt settlements directly with creditors, but having an experienced negotiator can improve your chances of success.

The goal of debt settlement is to resolve business debts for less than the full amount owed. This can provide immediate financial relief and stop collection activities. However, creditors will expect a lump sum payment in order to agree to a settlement, so you need to have funds available.

How Does Business Debt Settlement Affect Credit Scores?

While debt settlement can help resolve business debts, it will almost always damage your business credit scores. There are a few key reasons why debt settlement hurts credit:

  • The account will be reported as “settled” rather than “paid in full.” Settled accounts are considered negative items in credit scoring models.
  • The lump sum payment is typically much less than the original balance. Creditors see this as a loss.
  • Your payment history leading up to the settlement will be poor due to nonpayment of the debt. Payment history is a major factor in credit scoring.
  • Settling debt rather than repaying it as agreed indicates higher credit risk to potential lenders.

The exact impact on your business credit scores will depend on factors like:

  • Your current credit scores – Higher scores have more room to absorb hits.
  • The amount settled – Large settlements on big balances can cause bigger score drops.
  • Number of accounts settled – Settling multiple debts amplifies the damage.
  • Timeliness of payments on other accounts – Remaining current helps offset settlements.

While debt settlement almost always causes a credit score drop, it generally will not drop scores as much as bankruptcy or allowing accounts to charge off after making no payments at all. Still, you can expect business debt settlement to drop your scores significantly.

How Long Do Settled Accounts Impact Business Credit Scores?

Like other negative credit information, settled accounts will remain on your business credit reports for a period of time. Here is how long settled accounts will be reported:

  • Equifax – Settled accounts may remain for 24 months from the date of settlement.
  • Experian – Settled accounts may show for up to 7 years from the date of first delinquency.
  • Dun & Bradstreet – Settled accounts may show for up to 6 years.

During these reporting periods, the settled status will continue to negatively impact your business credit scores. Over time, as the settlement ages, the damage will gradually decrease. But even after settled accounts fall off credit reports, the hit to your scores can linger.

Can You Remove Settled Accounts from Business Credit Reports?

Since settled accounts are considered accurate information, credit bureaus will generally not remove them from your business credit reports. The accounts will age off the reports automatically once the reporting time limits have passed.

You may be able to get a settled account removed if you can demonstrate it is being reported inaccurately. For example, if the creditor is reporting the wrong settlement date or amount settled. Disputing errors with the business credit bureaus is the only way to potentially get a settled account removed early.

How to Minimize Damage from Business Debt Settlement to Your Credit

While debt settlement will almost always hurt your business credit, there are some things you can do to try minimizing damage:

  • Maintain on-time payments with all other creditors. This helps offset the negatives of a settlement.
  • Avoid settling multiple accounts around the same time period if possible.
  • Negotiate to have the creditor stop reporting the account as soon as it is settled. This will limit the settled status time period.
  • Contact creditors before debts become severely delinquent. Settling before an account is charged-off can help.
  • Don’t close credit cards after settling debts. Keeping accounts open preserves credit limits and history.
  • Monitor your business credit reports and dispute any errors in settled account reporting.
  • After debts are settled, focus on re-establishing positive payment history over time.

The impact on your credit is an important consideration when weighing the pros and cons of business debt settlement. While it can provide immediate financial relief, expect your business credit scores to take a hit that could negatively impact your access to new financing. Maintaining good financial habits and allowing time for the settled accounts to age can help rebuild business credit after debt settlements.

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