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Freedom Debt Relief to Pay Big Settlement to Washington Residents

The Attorney General in Washington announced today they had reached a settlement with Freedom Debt Relief to pay nearly $800,000 in restitution plus attorneys fees and costs.

We’re paying special attention to operations that take advantage of people who, due to this tough economy, are already struggling to put food on the table and keep the lights on,” Attorney General Rob McKenna said in a statement.

“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.” – Source

The California-based company agreed to pay up to nearly $740,000 in restitution to resolve allegations it violated Washington’s Consumer Protection and Debt Adjusting Acts. Plus Freedom Debt Relief will pay $70,000 to the State of Washington for investigative costs.

“We’re paying special attention to operations that take advantage of people who, due to this tough economy, are already struggling to put food on the table and keep the lights on,” Attorney General Rob McKenna said. “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.

Freedom Debt Relief advertises on its Web site that it has settled more than $1 billion in debt for its customers. Under its program, consumers stop making payments to their unsecured creditors and allow those accounts to go into default. Debtors then pay into a bank account they control, which is subsequently used to settled their debts. The company deducts its fees from the account. When sufficient money has accumulated in a consumer’s account, Freedom Debt Relief attempts to negotiate with creditors to settle the debts for a fraction of the balance.

About 1,100 Washington consumers who collectively owed $35 million in debt enrolled in the program since Freedom Debt Relief started operating in 2003. The Attorney General’s Office estimated that more than 570 of those consumers are eligible restitution under the state’s settlement.

“We believe hundreds of Freedom Debt Relief customers paid more fees than allowed under Washington’s law,” said Assistant Attorney General Bob Lipson. “Although the company disagrees, it will refund those fees to eligible former and current customers.”

Freedom Debt Relief stopped enrolling Washington residents in March 2009, when a private class-action lawsuit was filed against it. Attorney General Rob McKenna entered an amicus brief in that case, which is still pending in U.S. District Court in Spokane.

Today’s settlement bars Freedom Debt Relief from accepting any new clients in Washington without notifying the Attorney General’s Office, although it may continue to negotiate debt settlements for those currently enrolled in its program.

Washington’s Debt Adjusting Act caps the fee that a debt settlement company may charge at 15 percent of the total enrolled debt. The Washington Attorney General’s Office alleged Freedom Debt Relief sometimes charged consumers more than the state’s Debt Adjusting Act allows, took its fees before the time permitted by the statute and failed to adequately inform some consumers about how the program works.

Freedom Debt Relief denied the states allegations and contends that the Debt Adjusting Act doesn’t apply to its business model. However, as part of the settlement submitted today to King County Superior Court, the company agreed to the restitution program and to comply with certain restrictions on how it conducts business.

Freedom Debt Relief must refund Washington consumers for all fees paid in connection with debts that weren’t settled or aren’t in active negotiation programs — those fees add up to $742,613 or more.

The company will also pay $70,000 to reimburse the state for the costs of the investigation and litigation.

The agreement states that the company cannot suggest that its program is for everyone who might simply wish 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 respective accounts. The provision doesn’t prevent the company from receiving fees as allowed by the Debt Adjusting Act from the accounts or entering into settlement negotiations with creditors.

Consumers must authorize any settlement over 50 percent of the debt and be able to quit the program at any time without a penalty.

In the event that the company enrolls new Washington consumers in its program in the future, the settlement requires a number of disclosures to those customers, including:

  • That the program is only for people who are already in financial hardship and unable to make their minimum payments.
  • That the program assumes consumers will allow their credit accounts to become delinquent and that missing payments will likely have an adverse impact on the consumer’s credit history. And that the decision to stop making payments rests solely with the consumer.
  • That they may still accrue interest and late fees.
  • That it may take six months or longer before the customer has saved up enough money to allow the company to negotiate a settlement.
  • That the company will continue working toward a settlement even if a lawsuit is filed, and that a lawsuit could result in a judgment against the consumer for the full amount owed plus legal costs.

Consumer Refunds

Washington residents who enrolled in Freedom Debt Relief’s program may be eligible for a full or partial refund of paid fees. Consumers who already received refunds for all paid fees aren’t eligible for additional restitution under this settlement.

The refund program will be handled through a parallel, private class-action lawsuit on behalf of Washington consumers, which is also in the process of settlement. The case is Carlsen et al. v. Freedom Debt Relief, LLC, et al., Case No. CV-09-00055-LRS (E.D. Wash.). Once the court in that case gives approval, eligible consumers will be contacted about the refund process, how much money they are eligible to receive, and how to submit a claim.

Consumers who have questions about the refund program should contact The Scott Law Group in Spokane at 1-888-955-3966. Information is also online at www.thescottlawgroup.com/freedomdebtrelief.

The Judgment

The State of Washington v. Freedom Debt Relief judgment can be read here.

Freedom Debt Relief to Pay Big Settlement to Washington Residents

Freedom Debt Relief to Pay Big Settlement to Washington Residents
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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  • Calculator

    Things seem to move at a rapid clip round these parts.

    Freedom did the right thing here. I wonder if the escrow company and bank case in Washington where the other Amicus brief was recently filed will do the same?

    The danger here is that an example will and/or is being set by the settlement in either case that should provide some lunch money for others who could file similar cases against other companies.

    I am still curious how NoteWorld has addressed any related concerns they may have in this regard.

  • Calculator

    Things seem to move at a rapid clip round these parts.

    Freedom did the right thing here. I wonder if the escrow company and bank case in Washington where the other Amicus brief was recently filed will do the same?

    The danger here is that an example will and/or is being set by the settlement in either case that should provide some lunch money for others who could file similar cases against other companies.

    I am still curious how NoteWorld has addressed any related concerns they may have in this regard.

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