Credit scores recover faster for debt settlement customers than for bankrupt filers, study finds

Analysis of credit profiles by the former architect of FICO Scores reveals that debt settlement is a viable option for consumers looking to resolve high debt levels.


September 9, 2022

Frederic Huynh

The implications that debt relief strategies like bankruptcy and debt settlement have on credit and FICO profiles® The scores are an important factor for many consumers when considering their options for resolving serious financial difficulties. The study, Debt Settlement and Bankruptcy: A Comparison of Credit Scoresfound that six years after the start of debt relief, consumers who went through debt settlement have a higher median FICO® Scores as those who go through bankruptcy.

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

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

“Debt settlement clients are much more likely to qualify for credit scores after participating in the program than bankruptcy filers,” Huynh said. “This is highly relevant due to the wide use of credit scores – 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 important finding is that debt settlement clients have a lower risk of filing for bankruptcy in the future, as measured by the Equifax Bankruptcy Navigator Index, a credit risk model designed to predict the risk of future consumer bankruptcy. This is particularly noteworthy because bankruptcy risk ratings provide a more direct measure of whether the consumer’s debt or financial stress has been resolved.

It is important to note that the median FICO® The score for debt settlement clients bottoms out below the median score for bankruptcy filers, and the bottom occurs after signing up for debt settlement, as opposed to when filing for bankruptcy. But six years after launching 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 faster than bankruptcy filers.

“Bankruptcy has long been accepted as an effective strategy to give over-indebted consumers a fresh start with their finances,” Huynh said. “This research demonstrates that debt settlement can also be a viable debt relief strategy for consumers in financial difficulty, particularly when used as an intervention before consumers have no choice but to to file for bankruptcy.”

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

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

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


Huynh’s report and analysis is based on anonymized credit data from consumers who have filed for bankruptcy or registered for debt settlement from March 2014 through February 2015. Using the Credit Report and FICO® Score data from Equifax, along with proprietary data from FDR, consumer credit profiles were tracked over an eight-year period; the two years preceding the launch of a debt relief program and the six years following. The analysis and study results were derived independently by Huynh and FDR. The final report has been reviewed by FICO® and Equifax prior to publication. Additional details on the methodology can be found in the study.

The full report is available here.

About Liberty Debt Relief

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

SOURCE Freedom Financial Network

Janet E. Fishburn