Debt Settlement May Damage Credit Scores More Than Bankruptcy, TransUnion Finds
By CU Today Staff —
CHICAGO—Consumers enrolling in third-party debt settlement programs may experience significantly larger credit score declines than consumers filing for bankruptcy, according to a new TransUnion analysis that also found nearly half of settlement enrollees were current on their obligations when entering a program.
Three months before enrollment, debt settlement consumers had a median VantageScore 4.0 credit score of 587, compared with 570 among consumers who later filed for bankruptcy. Near-prime borrowers also accounted for a larger share of debt settlement enrollees, potentially making their financial distress more difficult for lenders to detect.
The pattern reversed after enrollment. Among consumers who were current when entering debt settlement, the median score declined 96 points—from 645 six months before enrollment to 549 six months afterward. Bankruptcy filers experienced a 20-point decline over the comparable period, from 582 to 562.
"Consumers often view debt settlement as a less disruptive alternative to bankruptcy, but our research found outcomes can vary significantly based on a consumer's circumstances," said Jason Laky, executive vice president and head of financial services at TransUnion. "For consumers who entered debt settlement while current on their obligations, score declines were often more severe than those observed among bankruptcy filers. This underscores the importance of understanding settlement-related exposure when making credit and account management decisions."
TransUnion said more than half of debt settlement enrollees were current when entering a program, limiting the effectiveness of monitoring based only on delinquencies. Combining bankruptcy-risk signals with trended credit attributes enabled its model to identify an additional 25% of eventual debt settlement enrollees within the highest-risk 10% of consumers, the company said.
"Many consumers entering debt settlement programs are not yet showing traditional distress indicators such as delinquency," said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. "Combining bankruptcy-related risk signals with credit trends like rising utilization, growing balances and increased unsecured borrowing helps lenders identify potential debt settlement enrollment earlier, make better credit decisions, and discuss alternative options with borrowers."
Originally reported by CU Today.