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California Debt Relief: Your Guide to State Laws and Managing Debt

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Unmanageable debt can affect consumers’ credit scores and overall ability to buy a home, finance a car and make other major financial decisions.

California is known to be expensive for housing and its citizens have the mortgage debt to prove it. On average, Californians have $55,920 in mortgage debt, which is the highest rate of any state in the nation and second only to Washington, D.C. Californians also have an average of $3,610 in credit card debt, the ninth-highest level of such individual debt in the United States.

Each state has unique laws and regulations to manage debt, including California. In this article, we’ll cover debt collection practices, state debt-relief programs, payday lending, and filing for bankruptcy, along with some tips on how to tackle debt in California.

Debt in California: At a glance

California Debt
Type Per capita balance, 2018 Rank out of 50 states* U.S. per capita balance
Credit card debt $3,610 9 $3,220
Student loan debt $4,530 41 $5,390
Auto debt $4,580 27 $4,700
Mortgage debt** $55,920 1 $33,680
*No. 1 is highest
**First-lien debt only
Source: Federal Reserve Bank of New York, March 2019

Debt collection in California

If you’re in debt, you may be familiar with the practice of debt collection. Whether through phone calls or letters, if you’ve become delinquent on a credit card bill, medical bill or other form of debt, you may be subject to attempts at debt collection.

Debt collectors must adhere to rules and regulations set forth by the state of California, as well as federal consumer protections. If you’re being contacted by aggressive debt collectors, it’s important to understand these laws to keep yourself safe.

The California/Rosenthal Fair Debt Collection Practices Act offers protection for consumers, particularly with regard to the frequency and manner in which debt collectors may contact those in debt. By law, California forbids these collectors, including both original and third-party creditors, from harassing debtors. This level of protection is unusual. Many states only forbid third-party collectors from harassing debtors, but California also bans this practice by original creditors.

In conjunction with the federal Fair Debt Collection Practices Act of 1978, the California/Rosenthal Fair Debt Collection Practices Act also prohibits third-party collection agencies from misleading debtors or making threatening phone calls to those in debt, regardless of the type or amount of debt consumers hold.The FDCPA is a federal law that protects consumers from abusive debt collection methods by third-party agencies. The legislation bars third-party agencies from making repeated phone calls to the debtor, whether at home, at the office or through friends and family.

Additionally, the California/Rosenthal act applies a statute of limitations on debt collection, preventing years-long collection efforts by third parties. By law, agencies must stop efforts to collect consumer debt in California once the debt is more than four years old. Oral contracts have an even shorter statute of limitations of just two years.

Responding to collection letters

When a third-party agency sends you a collection letter, take action to protect yourself and respond responsibly. You should generally avoid giving any financial or personal details to anyone who calls you by phone, even if they insist they are a collection agency.

Similarly, you should be careful when a company sends you a collection letter by mail. The CFPB provides sample letters for consumers to safely correspond with these agencies. There are letters available for a variety of circumstances, including times when you do not owe the debt the collectors are contacting you about, when you want the debt collector to cease contacting you, or when you need more information about the debt in question, etc.

Before you begin corresponding with a lender, it’s important to verify that the debt itself is legitimate to make sure you are not being targeted by scammers. The FDCPA mandates that consumers have the right to access information about the debt being collected. In California, if you do not recognize a debt, you have already paid it, you believe you do not owe the debt or you want to know more about the debt, you should dispute the debt in writing within 30 days of being contacted by a debt collector. You can use a CFPB sample letter to contact a debtor to make sure a debt is legitimate. Do not give out any personal information to a debt collector before verifying whether the debt collector is a valid entity.

If you think a debt collector has violated any federal or state regulations, you may file a complaint with the state attorney general’s office, the Federal Trade Commission (FTC) or the CFPB here.

Understanding California’s statute of limitations

A statute of limitations is the amount of time a debt collector is granted to sue a debtor in an attempt to recover what they are owed. Every state has its own statutes of limitations on debt collection practices, and California has some of the shortest statutes of limitations of any state on most types of debt — reports just six states have shorter limitations.

California has a statute of limitations of four years for most types of debt (20 years for state tax debt). The only exception are debts taken on via an oral contract, which are subject to a statute of limitations of two years.

California Statute of Limitations on Debt
Mortgage debt 4 years
Medical debt 4 years
Credit card 4 years
Auto loan debt 4 years
State tax debt 20 years

Be careful about paying or promising to pay debts that exceed the statute of limitations. You have the right to ask creditors whether the debt you owe is a time-barred debt (sometimes called “zombie debt”) and the collectors are required to give you an honest answer. In California, if you acknowledge a debt by making even a partial payment, you may reset the statute of limitations, so carefully consider whether you want to “resurrect” your zombie debt before making a payment after the statute of limitations has passed.

California debt-relief programs

If you’re in debt and attempting to either consolidate or reduce your total debt amount, it may be time to take a look at local programs designed to help consumers like you. These organizations can help you explore your options, whether you’re trying to consolidate your debt or bring your debts out of delinquency. Before beginning to work with a debt-relief organization, check the U.S. Department of Justice website to make sure the credit counseling agency is approved by the state of California.

Be sure to look out for scammers when seeking out debt-relief programs. Beware of programs advertising special deals and new government initiatives, as well as those that make unrealistic promises, charge upfront fees or have high commision rates.

California consumers may consider working with Consumer Credit USA, Inc., a nonprofit based in Downey. It offers a debt management program to help individuals consolidate unsecured debts, as well as bookkeeping services and credit education.

Debtwave Credit Counseling is a nonprofit based in San Diego. It offers credit counseling sessions, where a counselor can help someone in debt understand their credit, create a monthly budget, set financial goals and find a path out of debt.

One option that Californians can consider is Abacus Credit Counseling, a nonprofit organization that provides courses on filing for bankruptcy. It also offers access to financial professionals who will assess your debts and spending, helping you to understand how to achieve financial stability and reduce debts.

Money Management International is another organization that can help you take control of your debt through consumer education courses. This nonprofit offers assistance with everything from reducing credit card debt to filing for bankruptcy, managing student loans and creating a budget.

Payday lending laws in California

Here are a few key figures to keep in mind if you’re thinking of taking out a payday loan in California:

  • Maximum loan amount: $300
  • Maximum loan term: 31 days
  • Finance charges: 15%, up to $45

Payday loans are available in most states, but we do not recommend that you use them. It’s easy to get caught up in a payday loan trap, borrowing money to pay for this month’s bills with the promise to pay the lender back with your next paycheck. But when your next paycheck arrives, you’ll likely need that money to pay rent, utilities, credit card bills and other expenses, which can lead you to take out another payday loan, with another associated fee. It’s a vicious cycle, and one that can be hard to break. The CFPB reports more than 80% of payday loans are renewed or rolled over within 14 days.

If you do choose to take out a payday loan, first check whether the payday lender is licensed in California by searching on the California Department of Business Oversight (DBO) website. All payday lenders are required to be licensed by the DBO to conduct business in California, so verifying whether a lender is licensed is crucial.

California places other restrictions on payday lenders, too. The state requires lenders to inform borrowers of the full fee amount, charges for returned checks and payment obligations. Lenders must make clear that the borrower cannot be threatened or prosecuted if he or she does not pay back the loan on time.

Lenders are also prohibited from accepting collateral of any kind on a loan, and they may not provide a secondary loan to a borrower who has an outstanding payday loan in place. They also may not charge you more than once for any bounced checks, up to a maximum of $15.

Tips to tackle debt in California

No matter the amount, you can make efforts to pay off your debts in manageable ways that can help you break free of the cycle of debt accumulation. Moreover, you can explore options that not only help you to pay off your debts but also do so more easily and efficiently. Such strategies include debt consolidation, refinancing and credit card balance transfers.

Consolidate your debt

To pay off multiple debts more easily, borrowers can take out a debt consolidation loan. In this process, you take out a new loan (hopefully with a better rate and terms), and use that to pay off other debts all at once.

For example, if you have debt on several credit cards with high interest rates, you may be able to take out a debt consolidation loan with a lower interest rate, and use that loan to pay off your credit card debts. At that point, you’ll then be obligated to pay off the debt consolidation loan, but with lower interest rates and more workable monthly payments. This may allow you to pay off that debt more easily and in a shorter period of time.

As an added benefit, because you will have paid off several debts at once, you’ll have to make just one payment every month, rather than the many you may have been juggling to cover credit card debts, medical bill payments and personal loans.

While debt consolidation comes with many benefits, it also has its drawbacks. First, you’ll have to qualify for a debt consolidation loan, which may be difficult if you’ve fallen behind on your current payments and have a weaker credit score. You’ll also need to weigh the benefits of taking out such a loan. Making one monthly payment may be easier, and you may even be able to reduce your monthly payment amount. However, this lower monthly payment may mean you’ve stretched out the life of a loan, ultimately making it more costly over time.

Most crucially, whether you qualify for debt consolidation loan or not, you’ll need to examine your monthly budget and determine how you can improve your spending and saving habits and ultimately pay off your debts.

To be sure you’re getting a loan with your best terms, compare several options. You could start with your local credit union and then use a tool such as LendingTree to compare offers from multiple lenders at once based on your creditworthiness.


If you’re a homeowner, you may be able to refinance your mortgage as a form of debt consolidation. You can do so by taking out a cash-out refinance, a process in which you take on a new mortgage larger than the value of your home. You will then be left with the balance in cash, which you can use to pay off existing debts such as credit cards and medical bills.

You can undertake a similar process if you’re a car owner. For example, if you own two cars and payments for each car are due on different days of the month, you may want to consolidate your debt so that you only have to make one payment for both vehicles. You may also take the opportunity to refinance your auto loan into one with a lower interest rate. At that point, you may also be eligible to get cash back from the new loan, giving you additional funds to pay off loans with higher interest.

Another similar option is refinancing student loans. Refinancing these loans can be helpful if you’re looking to lower your monthly payment, pay off your debt more quickly, remove a cosigner from a loan, get a lower interest rate or opt into a plan that gives you more flexibility in a repayment plan. Keep in mind, however, that by refinancing federal student loans, you’ll forfeit the options to participate in repayment plans or student loan forgiveness programs.

Use a balance transfer card

If you have large amounts of credit card debt at high interest rates, you may also consider using a balance transfer card to pay off these balances. In this process, you move high-interest credit card debts from more than one card to single new card. It should offer a lower interest rate, or can even carry a promotional period offering a 0% annual percentage rate (APR). This no-interest period can give borrowers the opportunity to aggressively reduce their credit card debts without being hindered by high interest rates.

This option may be good for those who have very good credit and want to pay little to no interest while focusing on paying down heavy credit card debts. However, if you miss any payments or fail to pay off the balance during the promotional period, you may be subject to penalties or interest rates even higher than you had on previous cards once the 0% interest-rate promotion ends.

Filing for bankruptcy in California

If you’re considering filing for bankruptcy, you’re not alone — more than 779,000 people in the United States filed for bankruptcy in the year ending March 2018, according to the United States Courts. Consumers may consider filing for either Chapter 7 or Chapter 13 bankruptcy, the types meant for individuals rather than businesses.

Consider the types of debts you have incurred before deciding between Chapter 7 or Chapter 13 bankruptcy.When filing for Chapter 7 bankruptcy, you’ll be able to wipe out many, but not all, of your debts. You’ll be able to discharge credit card debt, medical bills, personal loans, promissory notes, lawsuit judgments, leases and contracts and most debt from car accidents. However, Chapter 7 will not wipe out child support or alimony debt, some tax debts or financial penalties for breaking the law or debts as a result of death or injury of an individual due to driving while intoxicated. Chapter 7 bankruptcy does not typically allow those filing to keep their property, as assets are liquidated.

Chapter 13, on the other hand, usually allows debtors to create payment plans and hold on to their property during the bankruptcy process. Chapter 13 is designed to help you work out a payment plan through a court-approved process, focusing on creating a plan to help you pay off debts within three to five years.

There are some concrete pros and cons to filing for bankruptcy. Once you file, you will immediately be protected from debt collectors pursuing you for payments. You will also be assigned a court-appointed representative to help you through the process, and you may be able to keep some of your assets, giving you a fresh start to repair your finances.

By filing for bankruptcy, you also may lose some of your assets, including your car, home and other high-value items, although this is determined on a case-by-case basis. And, despite what some may think, filing for bankruptcy will not automatically erase all of your debts. Federal student loans, for example, are exempt from bankruptcy, as are some other liabilities.

Filing for bankruptcy will also have a significant effect on your credit report. A Chapter 13 bankruptcy will remain on your credit report for seven years, while a Chapter 7 bankruptcy will remain on your credit report for 10 years. This can cause complications down the line, if you’re pursuing new financing, such as with buying a new home.

You can learn more about filing for bankruptcy in the Golden State by visiting the California Courts website, which offers guides, videos and resources for those considering this option in California.

Bankruptcy may make sense for you if you’re in over your head with outstanding debts and are looking for a fresh start. If you have bills in collections you’re unable to pay off, are at risk of losing your home, have incurred debt through an unexpected life event such as illness or death in the family and don’t want to dip into your retirement savings to pay off loans, bankruptcy may be a viable option.

The bottom line

Whether you’re trying to pay off a credit card quickly, seeking a cash-out refinance for a home or trying to rid yourself of burdensome medical debt, there are always options for debt relief. Explore each of these avenues fully before committing to any debt-relief program. When in doubt, consult an expert.

The information in this article is accurate as of the date of publishing. 


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