New Bill Aims to Regulate California’s Debt Industry

Many Americans are facing unprecedented levels of personal debt in the wake of the pandemic — and Californians are no exception. Many borrowers feel they have had little choice but to put living expenses on credit, something that can keep households afloat in the short-term while running up significant debt in the long-term. It’s only natural for consumers in debt to be searching for a way out from under this burden, particularly if they cannot qualify for bankruptcy or can do anything to avoid taking such a drastic measure.

Debt settlement is one potential debt relief strategy available to borrowers in the Golden State. At the center of this strategy is the fact that debtors who have already fallen behind on their obligations may be able to negotiate with creditors to accept a lesser settlement in lieu of receiving nothing. Many specialty programs exist to facilitate this process, including handling the negotiations and giving customers guidance on how to navigate settlement.

Since 2010, federal protections have existed to regulate how debt relief companies are allowed to operate. Now a bill introduced to the California Senate, AB-1405, aims to further regulate the debt relief industry within the state. Keep reading to learn more about its possible implications.

What Federal Debt Relief Rules Exist?

It’s helpful to understand what federal regulations are currently in place to control debt relief services. The Federal Trade Commission’s Telemarketing Sales Rule (TSR), which affects debt relief services, stipulates:

  • Charging fees up-front before resolving a debt is illegal.
  • Companies must disclose how services work, how long they may take, how much it may cost customers and what risks enrollees face before signing up participants.
  • Making fake or unproven claims about services violates the rule.
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This covers a basic overview of the main conditions of the TSR, which goes much more in-depth about exactly what debt relief organizations can and cannot do under the law.

What Could California Bill AB-1405 Affect the Debt Relief Industry?

The California legislature has been considering AB-1405, related to debt settlement practices within the state, for most of 2021. The title of this bill? The Fair Debt Settlement Practices Act.

This bill would apply many of the federal regulations outlined above specifically to any California debt relief program. So, the nature of the programs would not change; the companies would just face more regulations detailing what they must disclose to potential customers and how they must operate after enrollment.

One new rule the bill would introduce is creating a three-day window between when debt settlement companies give potential customers all the necessary information and disclosures about services and when the contract goes into effect. The bill specifies exactly what type of information debt relief companies would have to disclose, such as:

  • Companies cannot guarantee certain outcomes.
  • A Settlement can take months to reach.
  • Creditors can still contact borrowers enrolled in settlement and may even sue.
  • Enrollees are allowed to cancel their debt relief contract anytime without penalization.

Under this bill, what would happen if a debt relief company were to break any of these rules? The customer would be able to pursue a civil suit against the company for $5,000 or less within a four-year statute of limitations.

As of now, the bill AB-1405 still resides within the California Legislature as it undergoes amendments. If it passes, it would aim to add additional regulations to the debt relief industry within the state of California with an eye for protecting consumers against misunderstandings. Some worry this will drive debt relief organizations out of the state while others belief that reputable companies willing to follow the rules will have nothing to worry about while serving clients in the Golden State.

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Misty Tate

"Freelance twitter advocate. Hardcore food nerd. Avid writer. Infuriatingly humble problem solver."

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