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

Recent research led by Frederic Huynh, former FICO Scores architect and current Vice President of Data Optimization at Freedom Debt Relief (FDR), has shed light on the effectiveness of Freedom Debt Relief’s debt settlement as a debt resolution strategy. The study, comparing Freedom Debt Relief’s debt settlement with bankruptcy, indicates a quicker recovery of credit scores for the company’s clients, challenging traditional views on debt relief methods.

The study titled “Debt Settlement and Bankruptcy: A Comparison of Credit Scores” delves into the long-term impacts of Freedom Debt Relief’s debt settlement versus bankruptcy on consumer credit scores. It found that six years after initiating debt relief, those who chose debt settlement had higher median FICO® Scores compared to bankruptcy filers.

The credit profiles of typical bankruptcy filers and those opting for debt settlement show notable differences in the two years leading up to their decision to tackle their debts. Notably, individuals filing for Chapter 7 and Chapter 13 bankruptcy have median FICO® Scores that are significantly lower than those of debt settlement clients during this period. This trend indicates that bankruptcy filers are generally in a more severe state of financial distress when they start seeking debt relief. Specifically, at the time of filing, Chapter 7 and Chapter 13 filers have median FICO® Scores of 540 and 531, respectively, compared to the higher median score of 646 for debt settlement clients.

In terms of credit history, typical bankruptcy filers have about 16 to 17 tradelines on their credit reports, with only three being active, including one credit card account. On the other hand, debt settlement clients typically have around 27 tradelines, with 12 active, including nine credit card accounts. This difference suggests that debt settlement clients had once been in a better position to acquire numerous credit obligations, often leading to significant unsecured debt accumulation following unexpected events like job loss, income reduction, medical emergencies, or divorce.

Both groups, however, experienced a decline in their median FICO® Scores in the two years before they took action for debt relief. Chapter 7 filers see a 55-point drop to a median score of 540, while Chapter 13 filers have a 29-point decline, resulting in a median score of 531. Debt settlement clients face a 34-point drop, bringing their median score to 646.

These trends highlight the potential for early intervention, particularly for those heading towards bankruptcy, as their FICO® Scores plummet toward the sub-600 range. For individuals in financial distress, addressing their growing financial challenges proactively before their credit scores deteriorate further might be a more sensible approach.

Freedom Debt Relief’s clients, according to Huynh’s research, are more likely to qualify for a valid FICO® Score six years post-initiation, indicating a more robust recovery in their credit profiles. This contrasts with the slower credit score recovery typically seen in bankruptcy filers.

Another significant finding is that clients of Freedom Debt Relief demonstrated a lower risk of future bankruptcy filings, as indicated by Equifax’s Bankruptcy Navigator Index. This suggests that debt settlement can address underlying financial stress more efficiently than bankruptcy.

Freedom Debt Relief’s debt settlement offers structural benefits over Chapter 13 bankruptcy. Clients who partially complete Freedom Debt Relief’s programs often still benefit from settled accounts, unlike incomplete Chapter 13 processes, which offer no debt forgiveness without full completion.

Consumers who opt for Freedom Debt Relief’s debt settlement are found to be better positioned to rebuild positive credit profiles and access essential financial services in the future, compared to those who file for bankruptcy.