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Key Facts
- Federal level: Freedom Debt Relief describes its current program as debt settlement, not a loan, with money accumulated in a dedicated account for authorized settlements.
- Federal level: The Telemarketing Sales Rule generally bars covered for-profit debt-relief providers from collecting a fee before at least one debt is settled under an agreement and the consumer makes a payment under that agreement.
- Federal level: Debt settlement can damage credit and does not prevent a creditor or collector from filing a collection lawsuit while settlement funds accumulate.
- Federal level: Canceled debt is generally taxable income under federal law, although statutory exceptions and exclusions can apply.
Freedom Debt Relief is a debt-settlement service
Freedom Debt Relief’s current website describes a program that seeks creditor agreements to accept less than the enrolled balance, rather than lending money to pay off the debt.
The company states that clients make deposits into a dedicated account, review proposed settlements, and authorize payments when they accept an offer.
A settlement company cannot guarantee that every creditor will negotiate or that a particular reduction will occur.
Federal rules regulate how covered services are sold
The FTC’s Telemarketing Sales Rule defines debt-relief services broadly enough to include programs claiming they can renegotiate, settle, or otherwise change unsecured debt terms.
For covered services, the rule prohibits advance fees and requires disclosures about cost, timing, potential negative consequences, and dedicated accounts.
The fee condition is debt-specific: the provider must have changed at least one debt under an agreement the consumer accepted, and the consumer must have made at least one payment under that agreement.
Federal compliance does not, by itself, answer every question that may arise under state law.
The financial tradeoffs extend beyond the settlement amount
Accumulating money for a proposed settlement does not itself stop interest, late charges, collection activity, or a possible lawsuit.
The CFPB warns that debt-settlement programs can negatively affect credit scores and future access to credit.
This is why credit-card debt settlement is legally and financially different from a consolidation loan or a nonprofit credit-counseling debt-management plan.
The 2019 federal case is part of the record
In 2019, a federal court approved a settlement of the CFPB’s lawsuit against Freedom Debt Relief and co-founder Andrew Housser.
The CFPB stated that the judgment prohibited the challenged conduct, required $20 million in consumer restitution, and imposed a $5 million civil penalty.
The resolved case documents past allegations and binding settlement terms; it does not establish that every current customer or transaction presents the same facts.
Debt cancellation can create a separate tax question
The IRS generally treats debt forgiven for less than the amount owed as canceled-debt income unless an exception or exclusion applies.
Bankruptcy and insolvency are among the possible exclusions, and the correct tax treatment depends on the governing requirements and the taxpayer’s facts.
