What New Credit Bureau Research Says about Debt Settlement and Your Credit Score

If you’ve ever sat across from a Los Angeles bankruptcy attorney and said “I don’t want to file bankruptcy because it will ruin my credit,” you’re in good company. It’s one of the most common concerns we hear. That concern makes alternative options like debt settlement appealing when all you have to go on is what those companies advertise.

Now, we have some concrete data–and it tells a very different story about debt settlement, bankruptcy, and credit scores.

New Data about How Debt Settlement Impacts Credit Scores

A new report from TransUnion reveals that the decline in credit scores after entering a debt settlement program may be much more significant than declines after filing bankruptcy. In particular, researchers found that consumers who were current on their debts when they entered debt settlement saw their credit scores drop by an average of 96 points.

Declines were smaller for those who were already running behind when they signed up for debt settlement programs. But in all categories studied, those who chose debt settlement took a bigger hit to their credit scores.

People Who are Current on Their Debts See the Biggest Declines in Debt Settlement

The 96-point hit that’s making headlines is attention-catching. But it’s only part of the picture. TransUnion looked separately at people who entered debt settlement at three different stages:

• Current on their debt payments
• 30-90 days past due on their debt payments
• 120+ days past due on their debt payments

Here’s how each group was affected by debt settlement.

Bankruptcy Filers Lost Less Ground than Those in Debt Settlement

TransUnion also looked at bankruptcy filers across the same time period. We can’t compare category by category, because the study considered all bankruptcy filers together. Still, we do know that the average net drop in credit score for those who chose bankruptcy was 20 points–lower than for debt settlement participants at any level of delinquency. Bankruptcy filers also saw much smaller initial drops than any category in debt settlement.

An Honest Caveat – The Raw Numbers Don’t Tell the Whole Story

This snapshot provides fair warning about the impact debt settlement can have on your credit and how it generally compares with filing bankruptcy. But the two groups didn’t start from the same place.

The debt settlement consumers who were current when they enrolled started out with much higher credit scores: 645 on average, compared with 582 for the bankruptcy group. Naturally, those who started out with higher scores had further to fall. That’s why those who entered debt settlement already seriously delinquent saw smaller drops.

Bankruptcy filers who have strong credit scores when they file also see larger initial drops than those who start with lower scores.

Still, it’s worth noting that every category in the debt settlement group had an average credit score of 551 or lower at the six-month mark, while the average for the bankruptcy filers was 562. That’s not a big difference, but it’s a clear signal that the marketing pitch that says debt settlement will be better for your credit deserves some scrutiny.

What We Don’t Know about Debt Settlement and Credit Scores

The TransUnion report only measured credit scores up to six months after filing bankruptcy or entry into a debt settlement program. Most Chapter 7 bankruptcy cases are resolved within six months. So, for most filers, that six-month period covers the entire time they are in bankruptcy. That means that for most filers, we’re seeing the full impact of the bankruptcy filing on credit scores at the six-month mark.

A debt settlement program, on the other hand, generally takes two to four years to complete. During that time, some accounts typically continue to go further delinquent, go into default, and trigger collection activity. So, this new data doesn’t tell us the ultimate net effect of debt settlement on credit scores, just the early impact.

That’s especially troubling because about half of the debt settlement participants analyzed in the study were current on their obligations before they entered the program. That means they’d been working hard, paying their bills and establishing a positive credit history before they signed up. Their average credit score was 645, which means some had even higher scores.

How Debt Settlement Can Hurt Your Credit

One key way debt settlement hurts credit scores is by creating delinquencies where there were none, or worsening slight delinquencies. Many debt settlement companies advise their clients to stop making payments on their debts. Instead, the money that would have gone to those payments is collected in a pool of funds that the debt settlement company will later use to negotiate with creditors.

Typically, that means building up funds for months before a debt can be settled with a partial lump-sum payment. During all those months you’re building up funds and not making payments, your debts are being reported delinquent–first 30 days, and then 60, then 90, and eventually into default and perhaps collections. Those outstanding balances also sit on your credit report, increasing credit utilization and making you look like a poor credit risk.

Unlike bankruptcy, debt settlement doesn’t change the way those debts are reported–even when the program is successfully completed. The accounts are marked delinquent (or perhaps charged off) until the debt is settled. Then, they are often marked with “settled” or similar language to let credit bureaus and future lenders know you didn’t pay the full balance.

Debt Settlement Companies Can Be Shady

Both the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) offer warnings about working with debt settlement companies, and both state and federal governments have sued debt settlement companies. In 2025, the FTC sued several companies operating as “Accelerated Debt Settlement” for allegedly targeting senior citizens and veterans with false claims about the amount of debt they could eliminate.

The government described victims who saw balances increase significantly, who had to use retirement funds to pay off the growing balances, and even one who nearly lost security clearance due to the impact of debt settlement on his finances.

Fortunately, California residents have more protection than those in many other states. Still, the law isn’t an all-powerful shield, and it’s critical to thoroughly investigate your options and any company you are considering working with.

How California Law Protects Consumers

California regulates debt settlement companies more closely than most other states. Under the Fair Debt Settlement Practices Act (AB 1405, Civil Code §1788.300 and subsequent), a debt settlement provider operating in the state:

• Cannot charge a fee unless and until they have settled at least one debt
• Must provide specific written disclosures
• Must provide you with an unsigned copy of the contract before you sign
• Must send periodic statements on your settlement account
• Cannot make false or misleading statements about its services

You also have the right to cancel the contract, and consumers have a private right of action–meaning they can sue–if the debt settlement company breaks the law.

These are real protections and you should be aware of them. But notice what they do not do: none of them require your creditors to accept a settlement, and none of them protect your credit score. A company can follow California law to the letter and you can still end up where TransUnion’s numbers point–or even worse off.

Ask the Right Questions about Debt Settlement

“Will this hurt my credit?” is a fair question, but it’s not the best starting point when you’re seeking debt solutions. Realistically, if you are struggling to pay your bills, your credit is going to suffer–at least in the short-term. The better questions to ask are:

• When and how does this end? A settlement program depends on your creditors agreeing to negotiate. They don’t have to. Bankruptcy is a court process with a clearly-defined path and a predictable timeline.
• How much of my money will I still have? Debt settlement is funded with your money. You may end up paying less than the full balances, but you’ll still be paying–usually for two to four years. In a Chapter 7 bankruptcy case, most unsecured debt can be eliminated.
• Where will I be in three years? This question is bigger than “What will my credit report look like?” Many debt settlement plans last for three years or more. Chapter 7 bankruptcy is typically resolved in less than six months, so a bankruptcy filer may be 2+ years into rebuilding at the three-year mark.
• What are the tax consequences for going through Debt Negotiation? This is a topic that is rarely discussed by companies in the debt negotiation business. Hint: There are tax consequences!!

You Don’t Have to Solve Your Debt Problems Alone

A higher credit score isn’t really a win if you’re still dragged down by paying tens of thousands of dollars to clear up old debt. And, the TransUnion research shows that you could make that effort and still end up with a worse credit score.

Neither debt settlement nor bankruptcy is right for everyone, and they are not the only options. Your best first step is to learn about the pros and cons of all options, and about any companies you are considering doing business with.

We know that starts with a trusted source of information. That’s why we offer free consultations. If you’re considering debt settlement, bring us the paperwork. We’ll review it, explain it, walk you through the other options–even those we don’t offer ourselves. We’ll tell you the truth, even if the truth is that you don’t need our services.

You have nothing to lose by educating yourself. Call us today at 877-439-9717 or fill out our contact form to schedule your free consultation.