Unpaid Judgments, Collections and Charge-Offs on a Commercial Loan

A judgment or collection matters on a commercial loan file only if it is material, and the program defines material for judgments at $5,000 or more. A charge-off is tested differently: it disqualifies only when it is $5,000 or more and less than 12 months old, which means an old charge-off and a small charge-off are both survivable in a way an unpaid six-figure judgment is not.

That is the whole architecture, and most of what follows is the mechanism underneath it — where the threshold is silent, where a charge-off stops being a charge-off and becomes a housing-history problem, and what actually has to be resolved before a note can be signed.

The rule as written

Two separate lines in our guarantor qualification requirements do the work here. They are not the same test and they do not share a look-back.

Read those two sentences carefully, because the difference between them is the difference between a file that closes and a file that stalls.

The judgment rule has no time limit. A material unpaid judgment is a problem whether it was entered last month or nine years ago. The only stated escape is that the debt is unenforceable under the applicable state statute of limitations.

The charge-off rule has both a time limit and a size limit, and both must be true for the item to disqualify. A charge-off has to be at least $5,000 and within the last 12 months. Fail either half and the rule does not bite.

The two tests side by side

The practical consequence: a $40,000 charge-off from 20 months ago does not trip the charge-off rule. A $6,200 judgment from 2019 that has never been satisfied does. Borrowers routinely assume the reverse, because the charge-off is the bigger and uglier number on the report.

What "unpaid" is doing in that sentence

The judgment rule is written against unpaid judgments, not against judgments. That word carries the file.

A judgment that has been satisfied in full is no longer an unpaid judgment, and it stops being the thing the rule prohibits. This is why paying a material judgment is the ordinary path forward rather than a decline. The guideline does not impose a seasoning period after satisfaction, and it does not say a satisfied judgment continues to count against the guarantor. It tests the balance, not the history.

The same logic runs through the collection language. The rule reaches material unpaid collections. A collection resolved to a zero balance is outside its scope.

That is a meaningful contrast with the significant-derogatory events elsewhere in the same section, which are structured as waiting periods running from a completion date rather than as balance tests. A foreclosure is not curable by writing a check. A judgment generally is.

The threshold that is stated, and the one that is not

Here is a point worth being precise about, because guessing costs money.

The parenthetical defines materiality for judgments: judgments of $5,000 or more are material. The sentence also governs collections — it prohibits material unpaid judgments or collections — but the guideline does not state a dollar threshold for collections. It says collections must not be material and leaves the number unwritten in that line.

We are not going to supply a number that the document does not contain. What we can say plainly is what the rule does and does not settle:

• A judgment of $5,000 or more is material. That is stated.
• A judgment under $5,000 is not material under that definition.
• A collection must not be material, but the guideline does not define the collection threshold in the same sentence.

If your file has open collections in the low thousands, the right move is to put the actual tradelines in front of an underwriter early rather than assume the judgment number transfers. It may or may not. The document does not say.

Charge-offs: the 12-month clock, and which date starts it

The charge-off rule is the more forgiving of the two, and the reason is that it is written as a recency test. A creditor charging off a balance is an accounting event with a date attached, and the guideline asks only whether that event sits inside the last 12 months at the relevant size.

Two things follow.

First, time genuinely cures it. A charge-off that clears the 12-month window stops being disqualifying under this rule regardless of its size. There is no residual requirement in the charge-off line that the balance be satisfied.

Second, size genuinely cures it. A charge-off under $5,000 does not trip the rule even if it happened last month.

What the guideline does not do is define the measuring date in that sentence, and we are not going to invent one. If the charge-off date on your report is close to the 12-month line, that proximity is itself the thing to raise — a few weeks of difference changes the answer, and a credit report pulled at the wrong moment can decide it.

Those are the stated look-back windows in months, and the spread is the point. The ordinary charge-off carries the shortest clock in the section. Everything structured around a mortgage or a court outcome runs longer.

A charged-off mortgage is a different rule entirely

This trips up more files than the threshold does.

A charge-off of a mortgage account is not evaluated under the 12-month charge-off line. It sits with the significant derogatory housing events:

So the same word — charge-off — carries a 12-month window at $5,000 for a consumer tradeline and a 24-month window with no stated dollar floor when the account is a mortgage. A $3,000 charged-off mortgage balance from 18 months ago fails, while a $30,000 charged-off credit card from 18 months ago does not.

Check what kind of account the tradeline actually is before you decide which rule applies to it. Broader mortgage payment history — lates, rather than charge-offs — runs on its own separate test, covered in [one late mortgage payment and commercial loan approval](/blog/one-late-mortgage-payment-and-commercial-loan-approval).

What has to be resolved, and when

This is where the commercial file and the investor file genuinely diverge, and it is worth knowing which one you are on.

On the commercial side, the judgment and charge-off rules are written as eligibility tests. They describe a state the guarantor must be in. The guideline does not contain a general instruction on the commercial side that judgments, charge-offs and past-due accounts be satisfied or brought current prior to or at closing. The one item in this section with an explicit pay-at-closing mechanism is the tax lien rule, which has its own structure and its own exceptions — that is covered separately in [how a tax lien affects a commercial real estate loan](/blog/how-a-tax-lien-affects-a-commercial-real-estate-loan).

What that means in practice: a material unpaid judgment has to stop being unpaid for the guarantor to satisfy the eligibility test. The guideline does not specify a deadline in that sentence, which makes the timing an underwriting conversation rather than a rule you can read off the page. Do not assume you can close first and resolve after.

Items that can remain open:

• Judgments under the stated $5,000 materiality line.
• Judgments or collections where the debt is unenforceable under the applicable state statute of limitations.
• Charge-offs under $5,000.
• Charge-offs of any size that are outside the 12-month window.

Items that have to be dealt with:

• Material unpaid judgments, unless unenforceable.
• Material unpaid collections, unless unenforceable.
• Charge-offs of $5,000 or more inside the 12-month window — and here the only cure the text offers is time, not payment.

That last line deserves emphasis. Satisfying a recent large charge-off does not, on the face of the rule, move it outside the 12-month window. The rule tests whether the charge-off occurred in that period, not whether a balance remains.

What documentation clears each

The guideline names the standard for each item. It is considerably thinner on the specific documents, and we are not going to fill that gap with invented paperwork.

For a material judgment or collection, the rule offers exactly one named exit besides removing the unpaid status: the debt is unenforceable due to the state statute of limitations. The guideline does not specify what evidence establishes that, and it should not be read as an invitation to self-certify. Whether a particular debt is time-barred in a particular state is a legal question — take it to your attorney and bring back their analysis rather than a conclusion of your own.

For an item you intend to satisfy, the rule tests balance and status. Anything that establishes the account is no longer unpaid is what the rule is asking about. The guideline does not enumerate an accepted document list for this, so confirm the specific form with the underwriter handling your file before you pay anything, so the evidence you receive is the evidence that gets used.

For explanations, the closing document checklist includes a "Letter of Explanation for ______ (if applicable)" line. On the commercial side it is conditional and open-ended, not a standing requirement attached to every derogatory event.

For timing of the report itself, one hard number does apply:

That 120-day window is the operational trap. A file that runs long enough to require a re-pull gets re-tested against a fresh report — and a charge-off that was comfortably outside the 12-month window at application can be joined by something new, or a resolved item can fail to appear because the update has not posted. If you satisfy a judgment mid-process, get the evidence into the file rather than waiting for a bureau to reflect it.

The medical-collection difference between our two programs

This is worth one paragraph because it is a real difference and borrowers who have been through an investor file assume it carries over.

Our DSCR program for 1-4 unit investment property contains an explicit carve-out: medical collections are allowed to remain outstanding if the balance is less than $10,000 in aggregate. The small balance commercial guideline contains no equivalent medical carve-out. Its judgment and collection rule is written without reference to the type of debt — a medical collection is evaluated as a collection, under the same materiality language as any other.

The DSCR side is also more explicit about closing mechanics in ways the commercial side is not. It states directly that tax liens, judgments, charge-offs and past-due accounts must be satisfied or brought current prior to or at closing; that proceeds from a cash-out on the subject transaction may not be used to satisfy those items; and that a satisfactory explanation letter is required for derogatory credit events occurring in the last four years. None of those three instructions appears in the commercial guarantor section.

Do not import the investor rules onto a commercial file, and do not import the commercial silence onto an investor file. They are separate programs with separate documents.

The rest of the credit section that interacts with this

A judgment rarely arrives alone, and three other lines in the same section can catch a file that cleared the threshold.

Pending litigation. A guarantor may not have pending litigation that affects repayment of the loan or the long-term stability of the borrower or guarantor. An unresolved lawsuit that has not yet produced a judgment is evaluated under this line, not under the judgment threshold — so "it is not a judgment yet" is not the shelter it sounds like.

Financial-fraud felony. A felony conviction related to financial fraud within the past 10 years, measured from the release date, makes a borrower ineligible.

Credit depth. A guarantor cannot have only one credit score or less than 24 months of credit history, and there are minimum tradeline requirements independent of any derogatory item. Paying off collections can close accounts; closing accounts can affect the tradeline count. Sequence matters.

Scores. Our minimum is 650 for the primary guarantor and 640 for all other guarantors, with rate and leverage set by the guarantor with the highest middle score. Resolving derogatory items can move a score in either direction over the short run, which is another argument for coordinating the payoff timing with the file rather than acting on your own schedule.

What this page does not do

This page explains how our small balance commercial program treats unpaid judgments, collections and charge-offs as of the 8/3/2026 guidelines. It is not an approval, not a quote, and not a commitment to lend.

It does not tell you whether a specific debt is time-barred in your state — that is a legal question for your attorney, and nothing here should be read as legal advice. It does not address tax liens or IRS payment plans, which run on their own rule and are covered in the linked article. It does not cover mortgage late-payment history, bankruptcy seasoning beyond the look-back windows listed above, forbearance and modification requirements, or the credit-depth and tradeline rules in any detail.

It also does not supply numbers the guideline does not contain. Where the document is silent — the collection materiality threshold, whether smaller judgments aggregate, the measuring date for the charge-off window, the specific documents that evidence a satisfied item — this page says so rather than guessing, and those are the questions to bring to an underwriter with your actual credit report in hand.

Every figure here traces to the guarantor qualification section of the guidelines in effect on 8/3/2026. Guidelines change. Confirm against the current version before you rely on any of it.

Guideline SBC 08/03/2026 · Reviewed August 31, 2026

Published September 1, 2026 · Updated September 1, 2026