Business and personal credit scores have a lot in common. That’s because both commercial and consumer lenders want to know the same thing: how likely you are to repay your debts.
While civil judgments are no longer included in your personal credit report, court judgments against your business can still have an effect on your business credit score.
What is a judgment?
If your business has been sued by a creditor or supplier, it’s always a good idea to respond. If you don’t, the court may automatically rule in the plaintiff’s favor, which is called a default judgment.
If you respond and the lawsuit goes to trial, the court may enter against you based on the circumstances and content of the suit.
Depending on what the court decides, the judgment can require you to comply with certain demands, such as paying a debt that your business owes or providing compensation to a supplier.
Depending on the circumstances, the judgment can also include a lien on some of your business assets until you satisfy the court’s demands.
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How a court judgment affects your business credit score
Once a court enters a judgment against you, that judgment will show up on your commercial credit report. With Experian, that judgment will remain on your report for seven years, regardless of how you respond to it. That said, there will be a notation added once you have satisfied the court order.
It’s not exactly clear how a judgment can impact your business credit score, at least not in actual numbers. However, it can signal to other lenders that you don’t meet your financial obligations as a business owner. That added risk can result in a lower credit score.
One thing to note, however, is that only judgments against your business will be included on your business credit reports. Civil judgments against you personally aren’t reported to the commercial credit bureaus.
What’s more, they won’t even impact your personal credit score because the consumer credit bureaus no longer include them on your personal report.
How to avoid a court judgment against your business
Because court judgments remain on your credit report for so long, it’s important to do anything you can to avoid them. Here are a few ideas to consider.
1. Pay all your bills on time
You’ll never be sued by creditors or suppliers for non-payment if you always satisfy your liabilities on time. If you have irregular cash flow or you’re falling short, consider getting a business credit card or business loan to bridge the gap until you can recover.
While it’s not ideal to pay the high-interest rate of a credit card, it’s much better than the alternative.
2. Respond immediately to a lawsuit
If you’ve received a summons, you’ll typically have a set number of days to respond to it. Make it a priority to respond before that deadline. Otherwise, the court will enter into a default judgment against your business and give the plaintiff exactly what they’re asking for.
Even if you’re not confident that you can win, you’ll be better off engaging to have at least some say in the matter.
3. Try to settle out of court
If you can prevent a lawsuit from going to trial, you can avoid any potential of a court entering a judgment against you. Reach out to the plaintiff and talk about settlement options. In many cases, they won’t want to incur attorney’s fees any more than you do and may be open to having a discussion.
Of course, requesting a settlement won’t fix the problem unless you and the other party can agree on the terms. So even if you don’t have much leverage, it may be worth taking a less-than-favorable settlement to avoid long-lasting damage to your business’ credit history.
4. Defend the lawsuit
There’s no guarantee that defending yourself in court will eliminate the change of having a judgment entered against you. But at least you’ll have a chance. Hire an attorney to get some expert guidance, and mount a case based on your perspective of the events.
5. File bankruptcy
If your business isn’t in a position to satisfy the lawsuit’s demands in or out of court, it may be worth considering bankruptcy as a last resort. Depending on your situation, you may be able to use bankruptcy to modify payment terms, get on a payment plan, or eliminate your debts altogether by liquidating your business assets to pay off what you can.
Of course, filing for bankruptcy has its own negative effect on your business credit score, so it’s important to consider your situation and all of your options before making a decision.
The bottom line
Court judgments can hurt your business credit score, so it’s important to avoid them at all costs. If, however, you’ve already had a judgment entered against you, work on practicing good credit habits in general to build a positive credit history going forward.
Specifically, make sure to stay current on your liabilities going forward, keep your business credit card balances relatively low, and work to avoid any other significant negative credit events. It may take some time for your credit score to recover, but it’s worth the effort.
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This article was originally written on December 14, 2018 and updated on January 30, 2020.
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