Singletary: No shortcut to debt relief, so don’t buy the hype

Additionally, CFPB alleges that the company hid from customers the fact that several major banks have a standing policy to never work with a debt-settlement company.

Freedom also instructed consumers who were negotiating their own settlements to “expressly mislead” their creditors when asked if they were enrolled in a debt-settlement program, the CFPB alleged.

In response to the settlement, Freedom said it has been working with the CFPB to address issues raised in the lawsuit.

“In resolving the case, we have agreed to make some changes to our disclosures and policies to enhance our program, many of which were implemented when the case was first filed,” Freedom said in a statement.

This is how debt-settlement or debt-relief service programs usually work: The firm promises to work on your behalf, claiming they are better at negotiating a deal to reduce your unsecured debts, such as what you may owe on a credit card.

Consumers are often told to cease communication with their creditors. Typically, customers are also advised to stop any payments they may be making and instead put the money into a bank account with the intention of the debt-settlement company offering creditors a lump-sum offer for less than what’s owed.

One of the biggest problems with debt-settlement programs is that they can encourage consumers who are managing to keep up with their payment to default on their debts. Debtors already in default are told that they need to also make payments into a bank account so that they, too, can accumulate enough cash to make a lump sum offer to settle their debts for less.

This strategy makes sense on paper. Creditors or collection companies they hire can spend a lot of time trying to recoup what they are owed. So, they may be willing to accept a lump sum.

But for those desperate to get out of a financial hole, working with a debt-settlement company can make the situation much worse. When you stop making payments to your creditors as a part of a debt-settlement plan, you are likely to trigger penalties, higher interest rates and other fees.

Debt settlement also isn’t cheap.

“Debt settlement and similar programs offered by companies like Freedom often do more harm than good and turn out to be a waste of money,” said Andrew Pizor, an attorney for the National Consumer Law Center. “Consumers should talk to their creditors directly and do their own debt-settlement negotiations, or they should talk to a qualified consumer bankruptcy attorney.”

If you want low-cost debt relief, I suggest you get help from a nonprofit credit-counseling agency. To find a local agency, go to the National Foundation for Credit Counseling’s website — nfcc.org. There is no shortcut to debt relief. So don’t believe the hype.