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.