diff --git a/assets/settings/default.json b/assets/settings/default.json
index 743ec545f17ae..4a1ed777fd51f 100644
--- a/assets/settings/default.json
+++ b/assets/settings/default.json
@@ -312,7 +312,7 @@
     "auto_reveal_entries": true,
     // Whether to fold directories automatically and show compact folders
     // (e.g. "a/b/c" ) when a directory has only one subdirectory inside.
-    "auto_fold_dirs": false,
+    "auto_fold_dirs": true,
     /// Scrollbar-related settings
     "scrollbar": {
       /// When to show the scrollbar in the project panel.
diff --git a/crates/project_panel/src/project_panel.rs b/crates/project_panel/src/project_panel.rs
index 34e6e911936b9..c2f26d2e5caeb 100644
--- a/crates/project_panel/src/project_panel.rs
+++ b/crates/project_panel/src/project_panel.rs
@@ -5085,6 +5085,9 @@ mod tests {
             Project::init_settings(cx);
 
             cx.update_global::<SettingsStore, _>(|store, cx| {
+                store.update_user_settings::<ProjectPanelSettings>(cx, |project_panel_settings| {
+                    project_panel_settings.auto_fold_dirs = Some(false);
+                });
                 store.update_user_settings::<WorktreeSettings>(cx, |worktree_settings| {
                     worktree_settings.file_scan_exclusions = Some(Vec::new());
                 });
@@ -5102,6 +5105,15 @@ mod tests {
             crate::init((), cx);
             workspace::init(app_state.clone(), cx);
             Project::init_settings(cx);
+
+            cx.update_global::<SettingsStore, _>(|store, cx| {
+                store.update_user_settings::<ProjectPanelSettings>(cx, |project_panel_settings| {
+                    project_panel_settings.auto_fold_dirs = Some(false);
+                });
+                store.update_user_settings::<WorktreeSettings>(cx, |worktree_settings| {
+                    worktree_settings.file_scan_exclusions = Some(Vec::new());
+                });
+            });
         });
     }