Borrower Beware: Freedom Debt Relief

Richard ReadNovember 28, 2018

Consumers considering doing business with Freedom Debt Relief, the nation’s largest debt settlement company, should know that authorities have repeatedly forced it to pay fines and make refunds to customers.

In the latest enforcement action, the federal Consumer Financial Protection Bureau is suing Freedom Debt Relief, alleging that the California company charged customers without settling debts, made clients negotiate their own settlements and misled them about fees.

CFPB officials say that borrowers overwhelmed by debt should consider alternatives, such as working with a nonprofit credit counselor or negotiating directly with a creditor or debt collector.

NerdWallet recommends using debt management, consolidation or in some cases filing for bankruptcy. Do-it-yourself debt settlement can be challenging, but NerdWallet offers a step-by-step guide.

Fines, refunds and restitution

Freedom Debt Relief doesn’t admit to wrongdoing, but the company has paid fines and refunds in civil proceedings brought by state and local prosecutors. Company attorneys signed a 2009 consent judgment in California’s San Mateo County agreeing to refund customers as much as $500,000, reimburse government agencies $360,000 and pay a $90,000 fine.

Two years later, Freedom agreed to pay $742,000 or more in restitution to Washington state consumers and reimburse state prosecutors $70,000. Freedom agreed in 2015 to refund $134,000 in New Hampshire and pay a $54,000 fine.

Consumers considering any debt settlement company should know that state and federal authorities consider the industry untrustworthy.

“The targeted financially distressed consumers experience increased total debt, damaged credit and stepped-up collection efforts by creditors,” the New York City Bar Association said in a report.

Freedom Debt Relief disputes such conclusions and says the CFPB misunderstands how debt settlement works. Founded in 2002, the company claims to have settled debts exceeding $8 billion for more than 450,000 clients, saving them millions of dollars.

Consumers seek help with debt

Freedom and similar companies sign up consumers who have amassed unsecured debt, such as credit card charges, medical bills, personal loans and private student loans.

Under Freedom’s program, borrowers stop paying creditors and start making monthly deposits in special-purpose accounts. Freedom says that once this pot of money accumulates, the company will use the funds to negotiate with creditors, settling debts for less than the customer owed.

Yet meanwhile, balances and creditors’ fees pile up. Credit scores often take hits. Debt collectors call, and consumers can get sued.

Critics say that debt settlement fees further compromise customers, many of whom drop out of programs or get only some of their debts settled. Many customers don’t realize that some major creditors refuse to deal with debt settlement companies.

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