The spokesman says you can “reduce your debt by up to 50 percent and make one low monthly payment,” in a TV ad for Freedom Debt Relief. The company says it can help you eliminate debt in as little as 24 to 48 months without credit counseling or declaring bankruptcy. Instead, it will negotiate with your creditors to reduce the amount you owe. But according to a recent lawsuit filed against the company, many people who signed on with Freedom Debt Relief increased their debt loads; some declared bankruptcy.
Freedom Debt Relief (FDR) claims to be a leader in the debt-settlement industry and says it has helped consumers erase more than $500 million in debt since 2003. (FDR is also an umbrella group that includes Bills.com, Freedom Financial Network, Freedom Tax Relief, and several others.) It operates like other settlement companies often do. Customers deposit about 15 percent of the amount they owe into a bank account and give FDR power of attorney so that it can access the money to settle their debts.
A 2009 lawsuit brought by the district attorney’s office in San Mateo, Calif., charged that the company often “did not even contact all of the consumers’ creditors to negotiate a settlement.” After months of being told FDR was settling their accounts, many consumers found that creditors had sent their accounts to a collection agency or had initiated legal actions against them, the suit alleged. It also charged that many clients never finished the debt-relief program, even after months or years. But Freedom Debt Relief continued to charge them for administrative and service fees for about the first 18 months the accounts were open. In addition, the suit said, customers who wanted to find out the status of their settlements were often rebuffed by the company, and some were denied the money-back guarantee it advertises.
To settle the lawsuit, FDR agreed to pay the San Mateo County district attorney’s office and the California Department of Corporations $450,000 in fees and court costs and $500,000 in refunds to customers without admitting wrongdoing.
As a result of the suit, an earlier complaint by the California Department of Corporations alleging that FDR operated in the state for seven years without a license, in violation of a 2002 desist and refrain order, was withdrawn. FDR has also been forced to refund money to customers in Colorado and Rhode Island. And New York’s attorney general is investigating FDR and 13 other debt-settlement firms.
People who are deep in debt should first talk with each creditor to see if it has a plan for hardship cases that might allow them to reduce their payments. If collection agencies are calling, try to negotiate a reduction in principal, which is what a debt-resolution company promises to do. If you’re successful, you may have to pay taxes on the total that was forgiven.
If you can’t handle negotiating with creditors on your own, find a nonprofit credit counselor through the National Foundation for Credit Counseling, at nfcc.org, or by calling 800-388-2227.
If those strategies don’t work, you may want to declare bankruptcy. Contact the American Bankruptcy Institute (www.abiworld.org) or the National Association of Consumer Bankruptcy Attorneys (nacba.org) to find an attorney who can help you.
This article appeared in Consumer Reports Money Adviser.