Debt Settlement Can Hammer Credit Scores More Than Bankruptcy

Debt settlement is often pitched to people drowning in credit-card debt as a way to avoid bankruptcy. But for borrowers who are still paying their bills on time, it can come at a surprisingly steep cost.

An analysis published Thursday by TransUnion found that consumers who were current on their debts when they enrolled in settlement programs saw their median credit scores plunge 96 points over the following six months, compared with a 20-point decline for bankruptcy filers. It also found that credit scores recovered more quickly after bankruptcy than after debt settlement.

Consumers typically view debt settlement as a safer, less disruptive alternative to bankruptcy, said Michele Raneri, head of US research and consulting at TransUnion. The programs negotiate with creditors to reduce what borrowers owe, allowing them to resolve their debts for less than the full balance, often through a lump-sum payment. And unlike bankruptcy, a settlement doesn’t remain on a credit report for as long.

But that relief can come with costs borrowers may not fully understand when they enroll, Raneri said. Consumers are often instructed to stop making payments while they build up money for a settlement offer, which can trigger delinquencies, falling credit scores, late fees and even lawsuits from creditors.

The findings come as more Americans are struggling with mounting credit-card debt. Balances rose by $21 billion to $1.26 trillion in the second quarter, according to the Federal Reserve Bank of New York. The share of balances at least 90 days delinquent climbed to 12.9% in the second  quarter of 2026, from 7.6% in late 2022.

For Elizabeth Hunter, the damage to her credit score was a tradeoff she was willing to make

The 32-year-old communications specialist in Jacksonville, Florida, had been laid off twice and was struggling to keep up with nearly $12,000 in credit-card debt. She had considered bankruptcy, but worried she could lose her car because she still owed money on the loan. Debt settlement offered another route: one monthly payment and a plan to get out from under the debt within a few years.

A year later, she has paid off almost $5,000 of the debt and said her credit score, which dropped to about 470 after she enrolled, has begun to recover.

“I just needed one monthly payment to get a wrap on everything,” Hunter said. “I thought to myself, I am not able to make all of these individual payments, so if I can keep my payment at a point where I can make it within three years, I’m not going to buy a house within the next three years, so I’ll be okay.”

This article was provided by Bloomberg News.