The Myth of the 36-Month Debt Settlement Program

In September 19, 2008
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When you discuss debt settlement with most any debt settlement company, they will talk in terms of a typical 36-month program. Some companies, in an attempt to cast their fishing net even wider, will expand program duration to 48 months, or even 60 months. When I worked out the numbers given me by one caller, the settlement company had quoted her an 89-month settlement program! (This may be one good reason why the company that quoted this absurd program has racked up more than 1,500 BBB complaints!)

The purpose of this post is to explain exactly why the “36-month debt settlement program” is a myth that bears no relationship to the reality of how debt settlement works.

Way back in the year 2000, when I was helping build one of the nation’s first large-scale debt settlement companies, we had to figure out a way to enroll the maximum number of clients into the program. The easiest way to do that was to focus on the size of the monthly payment to fund the settlement process. Let’s say a client had $30,000 of credit card debt. Typical monthly payments in those days would have been about $600, or about 2.0% of the total. Obviously, the client could not sustain the $600/mo, which is why they were looking at other options. Backing off a half-percent to 1.5% made all the difference in the world. So we talked in terms of the 1.5% as the monthly funding pace, where a $30,000 debt client needed to fund the program at a pace of $450/mo, or 1.5% of the total balance. This relief of $150 per month was frequently enough for the client to breathe a little easier, and get away from “robbing Peter to pay Paul” every month.

Translating that $450/month to a settlement program, we assumed average settlement percentages at 40%. In those days, we charged 25% of the savings, so 25% of the 60% of savings yielded a fee of approximately 15% of the total debt. (See my post on the history of debt settlement fees for further insight – this is where the current standard 15% fee came from.) Add 40% to 15% and you get a total payout of 55%. Take 55% of $30,000, divide by $450, and voila – you get roughly 36 months, or three years. For someone who’s been in debt for many years, struggling to pay those endless minimum payments on the “forever plan,” getting out of debt in only three years sounds pretty good.

So far so good. However, the above calculation has two major problems. First, it ignores the fact that the debt balances climb when you’re not paying to hold the figures in line. So that $30,000 of debt would probably climb to more like $36,000 before everything got settled. Second, the assumption of 40% average settlements is too low, since the true average is more like 50%. In the “good old days,” a 40% average was do-able, but with the increase in legal pressure coming from the banks and the debt purchasers, the settlement percentages have climbed to around 50% over the years.

But in those days, it was totally possible to weather the storm for 3 years and expect to come out the other side with all your debts settled. So a 36-month program made a lot of sense for many clients seeking to avoid bankruptcy. However, there was never anything special about 36 months. It was just an artificial result based on how we calculated the payment level. In other words, we “backed into” the calculation to arrive at the 36-month outcome. Yet company after company copied our model without understanding the rationale behind it. You can just hear some of the greed-oriented conversations that must have taken place at those startups: “Hey, if 36 months is good, I bet we can sign up a lot more people every month if we lower the payment commitment and stretch the program to 48 months!” Presto. Now you have companies quoting 4-year programs. Wait? What about 60 months? Why not? Heck, why not take 6 or 7 years?

Debt settlement has changed. What worked a decade ago doesn’t work the same way anymore. Nowadays, a 36-month debt settlement program is absurd. Creditors sue much earlier in the process than they used to. (In fact, if you hire a settlement company that notifies the creditors of their involvement, you might see litigation within a few months, never mind 3 years!) And the debt purchasing industry has also become very aggressive, suing people left and right, using the courts to do their collection work for them. It’s simply unrealistic for most people to expect to survive 36 months without seeing lawsuits filed against them by one or more creditors long before they reach that goal. But you would never know any of the above by talking with a sales rep for the average debt settlement company. All that gets left out of the conversation, and the prospective customer is sold the illusion of a bank-recognized program (such as credit counseling), where it’s no problem to take 3 years to settle everything. The truth is that the banks don’t even recognize debt settlement as a legitimate industry. So there is no “program” there that protects the client from escalated creditor collection activity.

Another problem with the above approach to calculating program duration is the “cookie-cutter” effect. Let’s say you have $40,000 of debt spread fairly evenly across 8 cards, each with a balance around $5,000. Well, under those conditions, you can reasonably expect to settle some of the accounts before charge-off at 6 months (if you do it yourself, that is!), and a few more in the second 6-month period, and so on. If one of the accounts gets away from you and you’re forced to set up a full-balance payment arrangement, it’s still a better outcome than Chapter 13 bankruptcy over 5 years. But what if you have one $30,000 account and two $5,000 accounts? What then? Obviously, the above cookie-cutter approach to backing into the numbers is totally inappropriate. Sure, you’ll get the smaller ones settled ok, but it will take so long to save up to settle the whopper account that a lawsuit is all but certain before you reach the 36-month goal post.

Here’s the reality: It’s necessary to ANALYZE the list of creditors and take into account large balance accounts and their impact on the program. You cannot just take ANY list of debts into debt settlement and expect to be successful based on the cookie-cutter method of calculating the necessary funding pace and duration.

So what is a safe time frame? There is no such thing as a zero-risk debt settlement program, but it’s very unusual to see creditors litigate during the first six months, and lawsuits during the first 12 months are the exception rather than the rule. As you push well into the second year of the process though, the risk begins to climb. So my current advice to clients is that you should be in a position to raise enough money to settle your debts in a 12-18 month timeframe or less. This automatically means that most of the people enrolling in debt settlement programs are simply not good candidates for this strategy in the first place. It’s no wonder these companies rack up so many BBB complaints.

Folks, I’ve personally seen debt settlement change the lives of thousands of people for the better. But it has to be a good fit for your situation before you go down this road. In my training course, the first part of the material is designed to walk consumers through a financial self-analysis that leads to a firm decision one way or the other on whether this is the correct solution for their situation. This is one major reason why I offer my material with a money-back guarantee. I don’t want people to pursue debt settlement if it’s not a suitable strategy, and unless they have good odds at a successful outcome. If the math makes sense, debt settlement can work miracles! If the math doesn’t work, it can be a nightmare.

 

19 Comments

  1. I have two loans with african bank a credit and also with atlas finance and old mutual I need help maybe to settle all loans and repay amount of R2500,00 per month then pay only one payment. I pay R4000,00 a month. I need help please

    • Moloko, thanks for visiting the site. My program is designed for people in the USA only, sorry. I simply have no idea of whether or not the settlement process would work the same way in your country.

  2. Ellis, I can’t make a firm recommendation one way or the other because there is
    more to it than your total debt load and the number of accounts. Generally speaking,
    debt settlement is best applied as an alternative to Chapter 13 bankruptcy,
    but there is risk involved if you take too long. And I would be concerned
    that if there is literally nothing to work with beyond monthly cashflow (such
    as a 401k or IRA, family help, etc.), then it will take too long to get everything
    settled. However, some of the factors that come into play include what state you
    live in, who the specific creditors are, some of the history of the accounts (old
    balances or fresh debt, etc.). If you want to pursue it further, then please
    request a 20-minute consultation via the link to the form at the upper left of this
    blog page, and follow the steps for the pre-consultation “homework.”

  3. My wife and I have a total of $40,000.00 in 7 credit cards. We want nothing more than not have credit card debt. We have $1200 a month that we can save each month toward settle with the credit card companies. Do you think that is enough that we can settle and still avoid law suits. We have not made any payments since November. We have consider Debt Settlement programs but we have not found a company that we can trust. We met with an attorney about chapter 13 and almost sign the petition but last minute we felt that there was something not right about it.
    We went home and work the numbers and under their plan we were going to be paying almost double of what we owed.
    When you say that it is possible to settle for 50% of the debt do you say from what amount? the amount that includes late fees and penalties or the amount before we became late?
    We already receive a letter from a debt collector for one of our credit cards. Under our circumstance what are our options? Thank you for your help!

  4. Mary, yes, a creditor can garnish your wages. However, first they must sue you
    in civil court and obtain a judgment against you. They cannot simply start taking
    money out of your paycheck without first filing a lawsuit.

  5. Can a credit card account garnish your wages? I was offering US Bank to settle and they did not like the amount I offered so they are saying they saying because I have a job and so does my husband they can garnish my check.

  6. Mary, when you ask if you should “settle with what I can save over the next
    few years,” it tells me that you have a misunderstanding about how debt
    settlement works. You cannot take *years* to settle your debts! You will be
    sued by one or more creditors long before that. Debt settlement is a great
    alternative to Ch. 13 bankruptcy, but you need to be able to settle in 12 months
    or less, 18 months max. Otherwise, the risk is too high. You asked about Ch. 7
    bankruptcy. What I suggest is that you consult with an attorney to determine whether
    or not you pass the means test that would make you eligible for Ch. 7. If you
    pass the test, that’s a very good sign right there that you are not a good
    candidate for debt settlement and would be better off with Ch. 7.

  7. I have 55,ooo.oo in credit card debt. That I thought I could settle with on my own. I have stopped payments in Oct.2008. This debt was living cost debt. We buy only what we need. I will be getting a tax refund of about $5,000.00 that I could apply toward this settlement of debts and I can apply $380.00 every month. I also have a bonus once a yr that I can apply to this which is 1200.00. Right now we are living paycheck to paycheck mostly not enough to cover, are without propane and owe them over $600.00 before we can get more. Than the cost of the new fill. We have a disabled child whom we owe about $3000.00 in medical bills on and because of the States cut backs now will not beable to get the proper care she needs.Insurance covers nothing much and we just barely make too much to get help from the state. I am on WIC which provides some but only for two of the children. Because my husband and I got each a second job we now make too much for food stamps or any thing else. What would your advice be. Should I try to settle with what I can save over the next few years would it be enough or should we file Ch 7.

  8. I appreciate all of the information you provide in your website. My wife and I have a total of $40,000.00 in 7 credit cards. We want nothing more than not have credit card debt. We have $1200 a month that we can save each month toward settle with the credit card companies. Do you think that is enough that we can settle and still avoid law suits. We have not made any payments since November. We have consider Debt Settlement programs but we have not found a company that we can trust. We met with an attorney about chapter 13 and almost sign the petition but last minute we felt that there was something not right about it.
    We went home and work the numbers and under their plan we were going to be paying almost double of what we owed.
    When you say that it is possible to settle for 50% of the debt do you say from what amount? the amount that includes late fees and penalties or the amount before we became late?
    We already receive a letter from a debt collector for one of our credit cards. Under our circumstance what are our options? Thank you for your help!

  9. Carol, a 48 month debt settlement program is doomed to fail. Yes, they can
    still sue you even if you have nothing to take. Why would a creditor do this?
    Because judgments are valid for 10 years in most states, and you *may* have
    assets in the future, or wages that can be garnished, etc. I recommend you get
    two consultations with local bankruptcy attorneys. Find out if you’re eligible
    for Chapter 7 bankruptcy, which would allow you to discharge the debts in full
    for only the cost of the filing and attorney fees. Debt settlement only makes
    sense as an alternative to the much more complicated (and costly) Chapter 13
    bankruptcy.

  10. Charles, I am currently considering Debt Settlement. I am way over my head in credit card debt to the amount of 60,000 (four cards). I have no savings and no equity in my home. I thought this would be the way to go and will even struggle with the monthly payment of 843.17 for a 48 month program. After reading some of the comments I am concerned about a creditor suing. Can they sue when I have nothing? Do you suggest that I try and negotate with them on my own or should I use a debt settlement company? I appreciate any advice you can give me!

  11. Peter, I recommend against settlement in your case. The reason is because of the
    mathematics involved. To settle $9,000 of debt would require approximately $4,500
    in funds, and you would need to have this sum available quickly, 12 months or less.
    Otherwise, if you take too long to settle, you will get sued for the balance. But if
    you are already struggling with the existing payments, how will you be able to save
    up $4,500 quickly enough? In your case, you would be better off with the bank’s
    temporary hardship program, or a formal credit counseling program (where they might
    be able to get some of the overlimit fees waived, etc.).

  12. I have a small debt from three cards all HSBC, the cards together are about $9,000. One card is almost paid off and the second card has about $7,800.

    The problem is the overlimit and past due fees are about $800. My problem is that HSBC offered a 6 month hardship but they wanted my employer’s name and phone number.

    I have no equity. I do not own any real estate and I have a 13 year old car. I want to have some sort of arrangement where i do not have to pay off the $9,000 maybe settle for a lesser sum.

  13. Yes, Leanne, if a creditor sues you and obtains a judgment against you, they can
    place a lien on your house. If you haven’t done so already, you should file a homestead
    declaration with your local county offices. That way, you can protect the maximum
    amount of home equity permitted by your state’s rules. Also, while a judgment
    creditor (unsecured) can record a lien against real estate, that doesn’t mean you will
    lose the house. It only means that you cannot sell or refinance the property until the
    lien is satisfied first.

  14. I thought that unsecured credit card debt meant that they could not put a lein against your house. I have been out of work for almost a year now and have had family help me with my house note and living expenses. I have approx. 20,000 in credit card debt. I have been ignoring their calls until I had the money saved up, but now I am scared that they might come after the only thing that I have and that is my house. Can they do that?

    Leanne

  15. Claire: Debt settlement has nothing to do with negotiating your interest rate.
    It’s about settling for less than the amount you owe. Negotiation of interest
    rates is more along the lines of credit counseling, which is an entirely
    different process from what I teach in the course.

  16. Hi!
    The interests rates of my credit cards will rise by January 2009 and the monthly payment will be much higher (from $250/mo to $400/mo). Facing an unexpected much lower income, I know that I won’t be able to pay the monthly payment in full and will start to be in trouble with late fees and much higher interest rate, but if the credit cards companies would keep interest rate as they actually are, I will be able to continue to pay. Can a debt settlement program like yours help me knowing that I just want to keep low interest rate and monthly payments and try to work it out before January 2008. Thanks!

  17. Sabina: It depends on whether or not you have money to settle with! Judgments
    and liens can be settled, but it won’t be at 50% — more like 70-80%. Debts
    that have not yet escalated to legal status can normally be settled at or
    below 50% of the current claim balance. If you don’t have funds to settle with
    though, then debt settlement not be a good choice.

  18. I’ve already have judgements and liens in my house. The total dbt is about $30,000, last month I received a letter from one of the creditors asking me to contact their office they are debt collectors. Will your program still work in this situation?

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