Debt Relief Services in California: What You Need to Know

California has one of the highest costs of living in the country; only Massachusetts and Hawaii are more expensive.

Because everything in the Golden State from groceries to housing is more expensive, it’s no surprise that California residents have higher-than-average levels of debt. On average, California residents seeking debt relief have an average of $16,977 of credit card debt.

If your debt has gotten out of control, you may be wondering about what options may be available. There are several debt relief programs in California, offering debt settlement and negotiation services.

What Is Debt Settlement?

Debt settlement, sometimes referred to as debt relief, is a process where the borrower negotiates with their creditors to pay off, or “settle,” their debt for a percentage of what they owe. For example, someone with $10,000 of credit card debt may settle it for just $5,000. Debt relief can be a useful alternative to bankruptcy, eliminating your debt for less than you owe.

You can attempt to handle debt settlement negotiations on your own, or you can use a professional debt relief company.

California Debt Relief Laws

Debt settlement is a highly-regulated industry at the federal level, but California has its own laws regarding debt relief companies, too.

California Fair Debt Settlement Act

This act went into effect in 2022, and it outlines requirements and prohibited practices for the debt settlement industry. Key parts of the act include:

• It prohibits California debt relief companies from engaging in abusive, deceptive or unfair acts or practices.
• Debt settlement companies must provide consumers with disclosures and an unsigned contract no less than three days prior to execution.
• Monthly statements: Debt settlement companies within the state must provide consumers with monthly statements of amounts deposited in and withdrawn from their settlement account.
• Companies cannot collect any fees for debt settlement services until they have negotiated a settlement with at least one creditor and the consumer has made at least one payment for the settlement.
• Debt settlement companies must be transparent about the risks of their programs, including the potential impact to your credit score.

Assembly Bill 1405

Assembly Bill 1405 established fair debt settlement practices within the state, ensuring that companies adhere to strict guidelines and regulations.

It also allows consumers to cancel their debt settlement service at any time without penalty or fee as long as they notify the provider at least seven days in advance. Under the bill, consumers also have the right to bring civil action against companies who violated the provisions of the bill.

How to Choose a Debt Settlement Company in California

There are many debt relief programs in California, but not all are reliable. When looking for a company, consider the following information:

• Licensing and registration: In California, companies that make payments on your behalf under a debt settlement agreement have to be licensed, and they also have to register with the California Department of Financial Protection & Innovation.
• Accreditation: You can find reputable companies by searching the American Association for Debt Resolution database.
• Fees: Debt relief companies in California can only collect fees once they have successfully negotiated a settlement with at least one provider and you make at least one payment. The fees are usually a percentage of the enrolled debt. Fees vary by provider, but they usually range between 15% and 25%.
• Reviews: You can view customer reviews and get details about their experiences with particular companies on sites like TrustPilot.

Other Options for Debt Relief in California

Although debt settlement can be a useful option for some borrowers overwhelmed by their debt, it’s not for everyone. Debt settlement can be risky, and there’s no guarantee of success.

Depending on your situation, one of the following options may be a better choice:

• Debt consolidation: Debt consolidation involves consolidating your debt by taking out a personal loan and using it to pay off your unsecured debt, such as your credit card balances. Best for those with good credit, this option can allow you to save money thanks to the lower rates on debt consolidation loans.
• Debt counseling: If you need help identifying the root causes of your debt issues or managing your money, meeting with a non-profit credit counselor could be a good alternative. The counselor will review your finances, help you create a budget and develop a debt repayment plan.

FAQs

Is debt settlement legal in California?

Yes, debt settlement is a legal industry in California, but debt relief companies do have to adhere to state regulations.

How much does debt settlement in California cost?

Fees vary by company, but debt settlement companies usually charge a percentage of the borrower’s enrolled debt. Generally, fees range from 15% to 25%. For example, if you enrolled $10,000 of credit card debt into a debt settlement program, you could expect to pay between $1,500 and $2,500 in fees.

Can I settle my debt on my own in California?

Yes, but you may need a significant amount of cash. For the best chance of negotiating a settlement, you’ll need to pay a lump sum of about half of what you owe.

Is debt settlement taxable in California?

If your debt is discharged for less than you owe, the discharged amount is taxable as income at the federal and state level. For instance, if you had $10,000 of debt and settled it for $7,000, you’d have to pay taxes on the $3,000 that was discharged.