Your FICO Score, Debt Settlement and Bankruptcy
As we have mentioned previously, many debtors prefer to go to any lengths to avoid bankruptcy, including going to debt settlement companies to settle their debt for "pennies on the dollar." But is debt settlement really better for your FICO score and credit rating? Not really.
An account status that indicates debt settlement is bad news for your credit score. For a previous column on the subject, FICO's consumer operations manager Barry Paperno has said that debt settlement is considered negative by the scoring model "to the same extent as a charge-off or an account included in bankruptcy or repossession or something of that nature in which the lender took a loss on the debt."
If you believe the consumer operations manager of FICO, debt settlement doesn't improve your credit rating at all. To go a bit further, while bankruptcy won't send your credit rating into the 700's, it will pave the way for you to begin rebuilding your credit history and score by legally discharging debts and freeing up your future income. That's a benefit provided by bankruptcy that no debt settlement company can claim. Furthermore, debt settlement is not a guaranteed solution for all of your debt troubles. And even if you settle some debts, you could still be left with lawsuits and garnishments on debt which creditors refuse to settle.
If a debtor is facing multiple debts held by multiple creditors settling some of those debts is not going to improve their overall position financially unless they have a solid plan for making those other debts current. On the other hand, bankruptcy can discharge large amounts of unsecured debt while allowing debtors the financial flexibility to repay those debts which cannot be discharged in bankruptcy.