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Bankruptcy Risk Scores

posted by Bob Lawless

People talk a lot about credit scores as if there is some magic number hanging over your head and that number is following you everywhere. Isn't there maybe even some commercial like that? Like many things, the perception about credit scores is generally correct but often wrong in the specifics. It is generally correct in that the credit score does follow you just about everywhere. One way, however, that the perception is incorrect in the specifics is that there is nothing magical about the particular scoring system that is used. It's all about the algorithm the credit scoring company uses.

What many people don't realize is that different creditors might use different internal scoring systems to make their own decisions. One such system is the "bankruptcy risk score," which purports to identify which borrowers are more likely to file bankruptcy. The credit scoring companies might tell me that this is not a "credit" score because it is trying to measure something else, but a rose by any other name .... even if these are not particularly sweet smelling roses. Jeremy Simon over at CreditCards.com recently called me about these bankruptcy risk scores, and the article he wrote is here. It's an often overlooked aspect of the credit reporting industry. You may want to check it out.


To me its not really "My" credit score or owned by me. It is the credit card cos., mortgage cos. etc. score or owned by them. They are the ones that pay to report not me. I think that is why people have a hard time correcting errors. They (Credit Reporting agencies) take the word of the entity that is actually paying the bills (so to speak).

Many, many months ago, I had written a short post about one of these models, noting that the creditors might be much better able to predict bankruptcy than the consumer. The prevailing theoretical model for credit and collection is that the debtor has "secret" information about their prospect for bankruptcy.



What's funny about these scores is that they're sometimes built using credit scores. So you take a FICO score and you layer on some other metrics and voila!, it's a bankruptcy risk score.

I'm very dubious about any such metric that uses FICO for a component because (1) no one knows exactly what's in FICO, and (2) FICO components could and probably do change over time as Fair Isaac refines its models. This means that any score based on a FICO score is using a variable it doesn't understand and that might represent different things over time as a component of its output.

What worries me with all of this is that financial institutions' regulators don't understand this sort of consumer credit scoring and the like any better than they understand corporate risk models. That strikes me as a disaster waiting to happen.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.