Credit Scores Recover Faster for Debt Settlement Clients Than Bankruptcy Filers, Study Finds


Credit Scores Recover Faster for Debt Settlement Clients Than Bankruptcy Filers, Study Finds

September 9, 2022

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Analysis of credit profiles by former architect of FICO Scores finds debt settlement is a viable option for consumers seeking to resolve severe levels of debt.

SAN MATEO, Sept. 9, 2022 — Consumers who seek to resolve debts through debt settlement perform better on multiple credit score metrics than consumers who go through Chapter 13 bankruptcy, according to the findings of a new study by the consumer credit data expert Frederic Huynh.

The implications that debt relief strategies like bankruptcy and debt settlement have on credit profiles and FICO® Scores is an important factor for many consumers when considering their options to resolve severe financial distress. The study, Debt Settlement and Bankruptcy: A Comparison of Credit Scores, found that six years after initiating debt relief, consumers who went through debt settlement have higher median FICO® Scores than those who go through bankruptcy.

Huynh spent 18 years at FICO® overseeing the development of FICO® Scores and was the architect of FICO® Score 8 and FICO® Score 9. He is currently the Vice President of Data Optimization at Freedom Debt Relief (FDR), one of the largest providers of debt resolution services in the United States.

Huynh’s research found that six years after initiating their respective debt relief strategy, debt settlement clients were more likely to qualify for a valid FICO® Score than bankruptcy filers — meaning they had sufficient recent credit history to calculate a score. As a result, post-debt settlement consumers will generally have greater access to more affordable credit and less friction obtaining services that require a valid credit score when compared to bankruptcy filers.

“Debt settlement clients are far more likely to qualify for credit scores after their time in the program than bankruptcy filers,” said Huynh. “This is very relevant because of how widely used credit scores are — not having a valid credit score can create challenges for consumers. This is another overlooked area where debt settlement compares very favorably to bankruptcy.”

Another powerful finding is that debt settlement clients demonstrate a lower risk of filing for bankruptcy in the future, as measured by Equifax’s Bankruptcy Navigator Index, a credit risk model designed to predict consumers’ future bankruptcy risk. This is particularly notable because bankruptcy risk scores provide a more direct metric of whether the consumer’s indebtedness or financial stress has been addressed.

It’s important to note that the median FICO® Score of debt settlement clients reaches a lower trough than the median score of bankruptcy filers, and the bottoming out occurs after enrolling in debt settlement, as opposed to at the point of filing for bankruptcy. But six years after initiating their respective debt relief strategy, debt settlement clients have a median FICO® Score of 676, compared to 656 for Chapter 7 filers and 616 for Chapter 13 filers. This is an indication that debt settlement clients in general recover more fully and more rapidly than bankruptcy filers.

“Bankruptcy has long been accepted as an effective strategy to provide over-indebted consumers with a fresh start on their finances,” said Huynh. “This research demonstrates that debt settlement can also be a viable debt relief strategy for financially distressed consumers, particularly when it is used as an intervention before consumers reach the point of having no choice but to resort to bankruptcy.”

In both debt settlement and Chapter 13 bankruptcy, consumers who complete their debt relief programs experience the greatest recovery in credit profiles. Meanwhile, clients who exit debt settlement before addressing all their debt have higher median FICO® Scores than Chapter 13 filers who fail to have their debt discharged in bankruptcy. This is due to structural differences in the debt settlement and Chapter 13 processes. In debt settlement, consumers who don’t complete the program may still benefit from having some of their accounts settled. In Chapter 13, filers who do not complete their repayment plans will not benefit from the debt forgiveness associated with a successful discharge of debt.

Huynh’s research also found that consumers who pursue debt settlement are better equipped to re-establish a positive credit profile and responsibly obtain essential financial services than former bankruptcy filers. For example, 8.2% of debt settlement clients obtained a new mortgage five to six years after initiating debt relief, compared to 5.5% of Chapter 7 filers and 3.2% of Chapter 13 filers.

“Consumers need facts about debt relief options to make more informed financial decisions,” said Sean Fox, President of Freedom Debt Relief. “This study confirms that debt settlement compares favorably to bankruptcy on several credit profile dimensions.”


The report and Huynh’s analysis are based on anonymized credit data of consumers who filed for bankruptcy or enrolled in debt settlement from March 2014 through February 2015. Using credit report and FICO® Score data from Equifax, along with proprietary FDR data, the consumers’ credit profiles were tracked over the course of eight years; the two years prior to initiating a debt relief program, and the six years after. The study’s analysis and findings were independently derived by Huynh and FDR. The completed report was reviewed by FICO® and Equifax prior to publication. Additional details about the methodology can be found in the study.

The full report can be found here.

About Freedom Debt Relief

Freedom Debt Relief is one of the largest providers of debt resolution services in the United States. It works on behalf of consumers to negotiate with creditors and reduce the amount of debt they owe. FDR is an accredited debt resolution company based in San Mateo, Calif. and has served more than 800,000 consumers, helping to resolve over $16 billion in debt since 2002.

For media inquiries contact: Erica Bigley VP, Corporate Communications +1 415-710-9006