In a press release by Morgan Drexen (Morgan Drexen Warns Consumers: If You Choose Bankruptcy You Could Face a Devastating 240 Point Decline in Your FICO Score) the debt settlement company draws the conclusion and states “Perhaps the difference between debt settlement and bankruptcy, when it comes to FICO scoring, is simply this: through debt settlement, the consumer is making an honest attempt to pay something to a good faith creditor, rather than just walking away from his or her financial responsibilities through bankruptcy.” and “Now that FICO has revealed the inner workings of its scoring method, it’s clear that debt settlement is a better option for many consumers,” says Ledda. “And in spite of the nonsense that’s being spread by credit card collectors, not only can debt settlement substantially reduce the principal, reduce fees and penalties, and lower outrageous interest rates, it does so with less damage to your credit score than bankruptcy.”
That is the craziest interpretation of the FICO report I’ve seen. Obviously one that is self-serving to the debt settlement industry.
I especially enjoy the statement “Perhaps the difference between debt settlement and bankruptcy, when it comes to FICO scoring, is simply this: through debt settlement, the consumer is making an honest attempt to pay something to a good faith creditor, rather than just walking away from his or her financial responsibilities through bankruptcy.” Now isn’t the basic tenant of debt settlement that you are paying your debt back for less than you owe? And how is that not walking away from your debt?
The other astounding statement is that bankruptcy results in a bigger negative impact than debt settlement. But nearly all people who engage in debt settlement are told to let their accounts go past due, face a potential lawsuit, have part of their debt written off and then, and with fingers crossed, reach a potential settlement deal.
So let’s add up what FICO did revel, Bankruptcy with a credit score above 780 could result in a 240 point drop, but most people going bankrupt don’t have a score above 780. So bankruptcy with a score of 680 results in a 150 point drop. Plus we have to add in the 80 point delinquent penalty and the 65 point debt settlement penalty. Chances are the card was nearly maxed out as well for another 30 points but I won’t count that. Nor will I add in the lawsuit and public records listing on the credit report in debt settlement and what that could ding you with as well. So in reality the debt settlement point drop could be 145 as compared to 150 with bankruptcy.
In addition debt settlement can take years but bankruptcy provides immediate relief, stops collections and blocks all lawsuits. Certainly that has to be worth a tiny 5 point difference.