The nation’s biggest debt-settlement services provider will pay a steep price after allegedly deceiving borrowers who’d gotten in over their heads.

This past week, the Consumer Financial Protection Bureau (CFPB) reached a settlement with Freedom Debt Relief in which the company, while not admitting guilt, agreed to pay a $5 million civil penalty as well as $20 million in restitution to affected customers.

The federal watchdog agency alleged in a lawsuit that the California-based company violated the Federal Trade Commission’s Telemarketing Sales Rule by charging people in advance of debt-relief services, which is illegal.

The CFPB further said the company broke a second law — the Consumer Financial Protection Act — when it charged debtors without actually settling their debts. The agency alleged that Freedom charged fees — sometimes thousands of dollars — even when borrowers negotiated settlements on their own with their creditors.

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 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 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. So while you wait — sometimes for years — to see if debts can be settled for less than you owe, your debt burden may actually grow heftier. Ultimately, as was the case with some Freedom customers, many creditors may refuse to negotiate with debt-settlement firms and instead pursue legal action against you.

Debt settlement also isn’t cheap.

The CFPB said Freedom’s fees typically range between 18 percent and 25 percent of the debt amount. This means you need to weigh the fees you pay with the growth in your debt, because this might offset any savings you may realize. Additionally, many people can’t keep up with making payments to build up a lump-sum offer.

“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,” Andrew Pizor, an attorney for the National Consumer Law Center, said in a statement. “Consumers should talk to their creditors directly and do their own debt-settlement negotiations, or they should talk to a qualified consumer bankruptcy attorney.”

As a whole, the debt-settlement industry has been plagued for decades by shady practices and outright scams that take advantage of consumers distressed about their debt load, said Robert Lawless, the Max L. Rowe Professor of Law at the University of Illinois College of Law.

“People need to be very careful when choosing a debt-relief provider,” Lawless said.

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 — The agency can help you set up a debt-payment plan with a relatively small monthly fee.

There is no shortcut to debt relief. So don’t believe the hype.

Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or To read previous Color of Money columns, go to