A.G. Schneiderman Secures $1.1 Million For New Yorkers Defrauded By “Debt Settlement” Company
NEW YORK – Attorney General Eric T. Schneiderman today announced a major settlement that will refund money to more than 5,000 New Yorkers across the state who were defrauded by a deceptive and harmful debt settlement company. Freedom Debt Relief, one of the country’s largest debt settlement companies, misled debt-saddled consumers about the amount of money they would save and the services it would provide, while reaping large profits in up-front fees. As part of the settlement, Freedom Debt Relief will pay $1.1 million to refund former customers, offer current customers hundreds of thousands of dollars in refunds if they withdraw from the program, and pay $100,000 in penalties to the state. The agreement is available here.
The announcement comes as National Consumer Protection Week begins, and the Attorney General reminded New Yorkers that taking legal action against misconduct is just one way to attack fraud and abuse (see below for tips for consumer faced with significant credit card or other debt).
“Freedom Debt promised relief and financial stability, but left thousands of its customers even farther in the red,” Attorney General 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.”
The Attorney General’s investigation revealed that Freedom Debt lured debt-ridden consumers by making false and misleading claims. It promised to eliminate large portions of debt by negotiating directly with creditors, claiming that it could reduce total debt by 40 to 60 percent. Consumers were told that they would be “debt-free” within anywhere from one to three years.
However, the fundamentally flawed program left most New York 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 their creditors, customers made monthly deposits to a designated account that was purportedly to be used to settle their debt. Freedom Debt deducted its up-front 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 debt collection suits.
As part of the settlement, Freedom Debt will pay $1.1 million in refunds to former customers who suffered financial harm. It must also provide current customers who have paid up-front fees the option to withdraw from the program and receive partial refunds, which could amount to hundreds of thousands of dollars. Current customers will also 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 will also pay $100,000 in penalties, costs and fees to the state.
The Attorney General’s settlement also requires the company to comply with strict guidelines in how it represents its services. It is prohibited from misrepresenting any aspects of its debt settlement program, and may not make 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 debt collection suits. In addition, Freedom Debt may collect fees only after settling a consumer's debts.
The Attorney General’s Office receives a high number of consumer complaints about debt settlement companies like Freedom Debt, as noted in the list of top ten frauds reported by New York’s consumers in 2010, which Attorney General Schneiderman released yesterday.
Here are some important tips for consumer faced with significant credit card or other debt:
- Be wary of debt settlement companies that promise to reduce your debt substantially or to make you “debt free.”
- Never agree to sign a contract with a debt settlement company that requires the payment of up-front fees, which are generally illegal.
- Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits, or prevent enrolled accounts from growing larger by the addition of late fees, interest, and penalties. Also, credit reports will reflect derogatory information, including assessed late charges and non-payment of debt, and consequently credit scores will be adversely affected.
- Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance owed.
- Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts often resulting in judgments, wage garnishments, and freezing of bank accounts.
- A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer. Alternatively, it may be helpful to speak to an attorney or an accredited credit counselor who can help develop a plan of action that best works for each consumer's unique situation.
- Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
The matter was handled by Assistant Attorney General Jason P. Garelick, Assistant Attorney General Stephanie Sheehan, Law Graduate Max Dubin, and Deputy Bureau Chief of the Bureau of Consumer Frauds & Protection Jeffrey K. Powell.