Freedom Debt Relief, a debt settlement agency based in San Mateo, Calif., will pay $1.1 million to refund more than 5,000 New York residents who were misled about the amount of money they would save, according to New York Attorney General Eric T. Schneiderman's office.
An investigation revealed that Freedom Debt lured consumers by making false and misleading claims, including promising to eliminate large portions of debt by negotiating directly with creditors and claiming that it could reduce total debt by 40% to 60%. Consumers were told that they would be “debt-free” within anywhere from one to three years.
But the program, according to the attorney general's office, left most consumers with as much or more debt than they had before signing up for the service. In lieu of making even the minimum payments to creditors, customers made monthly deposits to a designated account that was purportedly to be used to settle their debt. Freedom Debt deducted its upfront fees from this account before it engaged in a discussion with consumers’ creditors – a practice it continued until the Federal Trade Commission banned it in October 2010.
When consumers were unable to make the strict monthly deposit schedule the program required, they dropped out of the program – having paid most or all of the fees without receiving the promised services. Freedom Debt customers were required to cease paying their creditors directly as a condition of enrolling in the program, so they accrued greater interest and late fees on their debts. Some saw their credit ratings fall, and were subject to wage garnishment and collection lawsuits, according to the investigation.
As part of the settlement, the company also must provide current customers who have paid upfront fees the option to withdraw from the program and receive partial refunds, which could amount to hundreds of thousands of dollars. Current customers also will have the option to remain with Freedom Debt under the condition that they will only pay additional fees upon the settlement of their debts. Freedom Debt also will pay $100,000 in penalties, costs and fees to the state.
The settlement further prohibits the company from misrepresenting any aspects of its debt settlement program, including statements about customer savings unless those statements are substantiated by prior results and incorporate fees.
Freedom Debt must notify consumers of key information about the program and the potential that it could have an adverse impact on a consumer's credit score or lead to collection lawsuits. In addition, Freedom Debt may collect fees only after settling a consumer's debts.
“Freedom Debt promised relief and financial stability, but left thousands of its customers even farther in the red," Schneiderman said. “This office has zero tolerance for those who prey on the vulnerable to make a profit, and will continue to root out the kinds of deceptive practices seen in this case. It is just as important that New Yorkers know how to both recognize and avoid a bad deal, so that they can make sound financial decisions.”
Last week, Washington Attorney General Rob McKenna's office reached an $800,000 settlement with Freedom Debt Relief after charging that the company violated the state's Consumer Protection and Debt Adjusting acts.
The state's Debt Adjusting Act caps the fee that a debt settlement company may charge at 15% of the total enrolled debt. The company allegedly charged consumers more than that in many cases, according to regulators. It also allegedly collected its fees before the time permitted by the statute and did not adequately inform many consumers about how the program actually works.
