Freedom Debt Relief, the largest company of its type in the nation, has agreed to pay nearly $2 million in restitution to resolve allegations it misled consumers in two states.
More than 570 Washington state consumers who signed up for Freedom Debt Relief's services will be eligible for about $800,000 restitution under the state's settlement with the California-based the firm. New York customers will be eligible for a pool of about $1.1 million.
"Failing to inform customers that their credit may be ruined and taking illegal fees -- when those individuals are making a good-faith effort to settle their debts -- are practices that we aim to stop," Washington State Attorney General Rob McKenna said in a statement.Under Freedom Debt Relief's program, consumers stop making payments to their creditors and put money into a bank account, which the company controls. The account is used settle their debts, and the company deducts fees from it. When enough money has accumulated, Freedom Debt Relief tries to negotiate with creditors to settle the debts for a fraction of the balance.
The settlement bars Freedom Debt Relief from accepting any new clients in Washington without notifying the Attorney General's Office. However, the firm can continue to negotiate debt settlements for those currently in its program.
Freedom Debt Relief stopped signing up Washington residents in March 2009, when a private class-action lawsuit was filed against it. The state filed a friend of the court brief in that case, which is pending in federal court.
Washington law caps the fee that a debt settlement company can charge at 15% of the total consumer's debt that is enrolled in the program. The state alleged that Freedom Debt Relief sometimes charged consumers more than state law allows, took its fees early and failed to inform some consumers about how its program works.
In the settlement, Freedom Debt Relief denied the states allegations and contended that the Debt Adjusting Act doesn't apply to its business model. However, as part of the settlement, the company agreed to the restitution program and to comply with restrictions on how it conducts business.
The agreement states that the company can't suggest that its program is for everyone who may simply want to reduce their debt, misrepresent any statistics relating to its negotiations on behalf of consumers or withdraw or transfer any funds saved by consumers in their accounts. However, the company can receive fees as allowed by state law from the accounts or enter into settlement negotiations with creditors.
Consumers are required to authorize any settlement more than 50% of the debt and must be able to quit the program at any time without a penalty.
The company didn't comment about the Washington settlement, but did issue a statement about resolving the New York case.
"We obviously disagree with the way the attorney general's office read the data FDR provided," company CEO Andrew Housser said in a statement sent to Consumer Ally. "However, prolonging or escalating this dispute will not serve New York consumers; disputes such as these only prolong the consumer's inability to make fair assessments of debt relief programs as effective solutions that are available to them. This closure puts the matter behind us and get back to our focus: getting the best possible resolutions for those consumers who are most in need."
Freedom Debt Relief also has reached settlements in Colorado, Rhode Island, California, and Delaware.
For suggestions on finding a debt counselor, see the U.S. Department of Justice's U.S. Trustee Program or National Foundation for Consumer Counseling.The Federal Trade Commission's "Knee Deep in Debt" also offers helpful information.
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