Debt-Ridden New Yorkers Getting $1.1 Million In Refunds

As part of a settlement with a company offering debt settlement services, more than 5,000 New Yorkers will get refunds totaling $1.1 million.

New York Attorney General Eric T. Schneiderman announced the agreement with Freedom Debt Relief, a company he says 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.

"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."

Lured consumers

Schneiderman said his investigation revealed that Freedom Debt lured consumers by making false and misleading claims, promising 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.

But, says Schneiderman, the company's program was fundamentally flawed, leaving 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.

Not just one company

Schneiderman says these practices aren't limited to this particular company, and that consumers should be wary of most firms promising credit relief. His advice? Be wary of debt settlement companies that promise to reduce your debt substantially or to make you "debt free." Also, never agree to sign a contract with a debt settlement company that requires the payment of up-front fees, which are generally illegal.

Keep in mind that 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.

Schneiderman says 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.