California Debt Laws and Consumer Protections

Important Notice
This page is published by Golden Financial Services, Inc. for general informational purposes only. Golden Financial Services, Inc. does not offer, sell, broker, or recommend debt relief, debt settlement, debt consolidation, credit counseling, or any other debt-related services. This page is not legal, tax, or financial advice. Laws change frequently and the information below may not reflect current law in every detail. California consumers facing debt-related decisions should consult a licensed California attorney, a nonprofit credit counseling agency, or another qualified professional.

Overview:

California consumers considering options for managing debt have several pathways available to them, each with different costs, timelines, and consumer protections. Common categories include credit counseling, debt management plans, debt settlement, debt consolidation loans, and bankruptcy. Each is governed by a combination of federal law and California state law. California has some of the strongest debt-related consumer protections in the country, including a relatively short statute of limitations on most consumer debt and a homestead exemption that protects substantial home equity. This page summarizes some of the most relevant rules and points to authoritative resources for further research.

California-Specific Rules

Statute of Limitations on Debt:

In California, the statute of limitations for actions on a written contract — which generally includes credit card debt — is four years (Cal. Code Civ. Proc. § 337). The limitation period for actions on an oral contract is two years (Cal. Code Civ. Proc. § 339).

Once the limitations period has expired, a creditor or debt buyer is generally barred from suing to collect the debt, although they may still attempt collection through other means. Making a payment, signing an acknowledgment, or otherwise reaffirming the debt in writing can sometimes restart the clock — California consumers should consult an attorney before doing any of these if a debt is near or past the statute of limitations.

California Fair Debt Settlement Practices Act

California has its own debt settlement statute that goes beyond federal law. The California Fair Debt Settlement Practices Act, codified at Cal. Civ. Code § 1788.300 et seq. and effective January 1, 2022, applies to for-profit debt settlement providers and the payment processors that handle settlement funds. Among other protections, the Act:

• Prohibits false, deceptive, or misleading practices by debt settlement providers
• Requires specific written disclosures and an unsigned copy of the contract before a consumer signs
• Allows consumers to terminate a debt settlement contract at any time without fees or penalties
• Requires payment processors to close settlement accounts and return remaining funds within seven days of cancellation
• Provides a private right of action allowing consumers to sue for violations, with statutory damages of up to $5,000, plus actual damages, attorney’s fees, and other relief

California consumers considering a debt settlement program should ask whether the provider is registered or licensed appropriately and should request the disclosures and contract documents the law requires.

Wage Garnishment

California law limits how much of a consumer’s earnings can be garnished by a judgment creditor (Cal. Code Civ. Proc. §§ 706.050–706.052). California’s protections are generally more protective than the federal floor under Title III of the Consumer Credit Protection Act.

California limits garnishment for ordinary debts to the lesser of (a) 25% of disposable earnings or (b) the amount by which weekly disposable earnings exceed a multiple of the state minimum wage.

Recent legislation has further reduced garnishment exposure for low-wage earners. Certain types of income (Social Security, disability, veterans’ benefits, public assistance) are generally protected from garnishment under federal and state law.

Homestead Exemption

California’s homestead exemption protects equity in a primary residence from forced sale by most judgment creditors (Cal. Code Civ. Proc. § 704.730).

Under reforms enacted by AB 1885 (effective January 1, 2021), the exemption is the greater of:

• A statewide minimum amount, adjusted annually for inflation, or
• The countywide median sale price for a single-family home in the prior calendar year

The amount cannot exceed a statutory cap, which also adjusts annually for inflation. Because both the floor and the cap adjust each January based on the California Consumer Price Index, consumers should consult current sources for the applicable amounts in their county.

The exemption applies automatically to a principal residence; recording a Declared Homestead provides additional protection in voluntary sale scenarios. The homestead exemption does not protect against foreclosure for unpaid mortgage debt or property taxes.

Other Personal Property Exemptions

California provides exemptions for various categories of personal property under Cal. Code Civ. Proc. § 704.010 et seq., including motor vehicles, household furnishings, tools of the trade, and certain retirement accounts.

California also offers an alternative exemption system under Cal. Code Civ. Proc. § 703.140 that may be elected in bankruptcy proceedings. Choosing between systems is consequential and should be done with the advice of a California bankruptcy attorney.

Licensing and Regulation

The California Department of Financial Protection and Innovation (DFPI) regulates a wide range of consumer financial services in California, including certain debt-related services. Consumers should verify that any provider they consider is appropriately licensed or registered with DFPI before engaging their services.

Federal Consumer Protections That Apply in Every State

Telemarketing Sales Rule (TSR) — Advance Fee Ban

Under the FTC’s Telemarketing Sales Rule (16 C.F.R. § 310.4(a)(5)), for-profit debt relief companies that sell their services over the telephone are prohibited from collecting any fees until they have actually settled or otherwise resolved a consumer’s debt.

A company that asks for an upfront fee before settling any debt is violating federal law. There are limited exceptions involving dedicated bank accounts, but the general rule is: no settlement, no fee.

Fair Debt Collection Practices Act (FDCPA)

The FDCPA (15 U.S.C. § 1692 et seq.) governs the conduct of third-party debt collectors. It prohibits collectors from contacting consumers at unreasonable times or places, from using abusive or deceptive language, and from contacting consumers at work after being told the employer prohibits it.

Consumers have the right to dispute a debt in writing and to require collectors to verify the debt before continuing collection.

California also has its own state-level Rosenthal Fair Debt Collection Practices Act (Cal. Civ. Code § 1788 et seq.), which extends similar protections to original creditors as well as third-party collectors.

Fair Credit Reporting Act (FCRA)

The FCRA (15 U.S.C. § 1681 et seq.) gives consumers the right to obtain a free annual copy of their credit report from each major credit bureau, the right to dispute inaccurate information, and the right to be notified when negative information is added.

Credit Repair Organizations Act (CROA)

The CROA (15 U.S.C. § 1679 et seq.) prohibits credit repair organizations from charging fees before services are fully performed and requires written contracts with specific disclosures and a three-day cancellation right.

Questions California Consumers May Want to Ask Any Provider

Before engaging any debt relief, debt settlement, debt consolidation, or credit counseling provider, California consumers may want to consider asking:

1. Are you registered or licensed to provide debt-related services in California, and what is your registration?
2. Do you comply with the California Fair Debt Settlement Practices Act, and can you provide the disclosures the Act requires?
3. What fees do you charge, when are they collected, and are they contingent on results? (Federal law generally prohibits advance fees for telemarketed debt relief.)
4. How long is the typical program, and what percentage of enrolled consumers complete it?
5. What happens to my credit score during and after the program?
   What is the tax treatment of any forgiven debt? (Forgiven debt over $600 is generally reportable to the IRS on Form 1099-C and may be taxable.)
6. Will creditors continue to call, sue, or report negative information during the program?
   Can I cancel the program, and if so, what happens to fees already paid?
7. Are funds I deposit held in an FDIC-insured account in my name?
8. What is the company’s complaint history with the BBB, the CFPB, the California Attorney General, and DFPI?

Authoritative Resources

• Consumer Financial Protection Bureau — consumerfinance.gov — federal consumer protection agency; complaint database, debt help guides
• Federal Trade Commission Consumer Information — consumer.ftc.gov — debt relief and credit information
  California Attorney General Consumer Protection — oag.ca.gov/consumers — file complaints, consumer alerts, research providers
• California Department of Financial Protection and Innovation (DFPI) — dfpi.ca.gov — licensing and regulation of consumer financial services in California
• State Bar of California — Lawyer Referral Service — calbar.ca.gov — referrals to licensed California attorneys
• U.S. Bankruptcy Courts — California Districts — California has four federal bankruptcy districts (Northern, Eastern, Central, and Southern). Each district has its own court with information for consumers considering bankruptcy.
• California Legislative Information — leginfo.legislature.ca.gov — full text of California state statutes, including the Code of Civil Procedure and Civil Code
• California Courts Self-Help Center — selfhelp.courts.ca.gov — guidance for consumers handling debt-related court matters

Disclaimer
This information is provided for general educational purposes only. It does not constitute legal, tax, or financial advice. Statutes, regulations, and case law change. Specific facts can dramatically affect outcomes. California consumers should consult a qualified California attorney or other licensed professional before making decisions about their debt or finances.