A new California debt settlement law was passed in 2021, called the AB 1405, Wicks Debt settlement practices bill. Buffy Wicks, a Democrat that serves under the California State Assembly, is the author of the bill. Wicks is probably most famous for her viral YouTube video, which made a point about the struggle of working mothers.
“When California Assemblywoman Buffy Wicks rushed to the floor to vote on State Bill 1120, she intended to make a point about the state’s housing crisis. But a video of that moment has gone viral for making an entirely separate point about the struggle of working mothers.”
Debt settlement companies promise to lower a person’s debt, not always clearly going over the potential downsides of a debt settlement program. The new law aims to enforce transparency by debt settlement companies.
In the following blog post, we explain the new California debt settlement law and also remind consumers about the federal debt settlement law (i.e., the TSA) that’s already in place.
As a consumer, you need to know about the laws. Unreputable debt settlement companies can take your money and leave you in worse financial shape. But reputable debt settlement programs can save you from bankruptcy and help you become debt-free fast.
Why the new California debt settlement law was passed?
Like a doctor is obligated to explain the potential side effects of a particular medication before prescribing it, a debt settlement company must be transparent about the potential downsides of a debt settlement program before enrolling a consumer.
Similarly, a debt settlement program that doesn’t have a plan in place to address potential downsides is like a doctor not having an alternative medication for his patient if the one medicine produces undesirable side effects.
The road to financial freedom is not always straightforward because obstacles often come in the way and the path can zig-zag at times. So debt consolidation companies need to be prepared to deal with all scenarios.
The new CA debt settlement law:
- Requires companies to offer full disclosure of pros and cons.
- Forces debt negotiators to be prepared to help address obstacles that can occur while on the program before fees can be earned.
- Provides consumers legal remedies to deal with unreputable California debt reduction companies that break the law.
According to Paul Paquin, the CEO here at Golden Financial Services, a licensed debt management provider in Texas and California debt relief company: “It’s the debt counselor’s moral, legal and ethical duty to verify the consumer understands how the debt settlement program will work, including each downside.
Furthermore, a debt counselor will get more sales if they are confident in explaining downsides and how each would get addressed, over someone who sounds like a shady car salesman.
As an example, if the consumer receives a summons – How will it get resolved? Debt counselors need to tell the truth. And if the truth is not an appealing option, perhaps it’s time to find another company to work for, one that offers a program which people want to sign up for”.
Erika Paz explains in her recent article about the new debt settlement law and regulations:
California debt relief programs are a booming industry.
“As California emerges from the pandemic, some residents face crippling personal debt, even as many of the state’s richest residents have seen their wealth grow. The booming debt negotiation industry is among the economic winners, composed largely of online companies that promise to reduce unsecured debt by negotiating with banks and credit card companies on the customer’s behalf.”
But consumer advocates point out, “these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.”
Assemblymember Buffy Wicks, a Democrat from Oakland who authored the new California bill, contends that; “Existing federal regulations don’t go far enough to protect Californians.”
Wicks wants to ensure if people are working with settlement companies; “There’s transparency and empowerment for the consumer in that process.”
Before we go over the new California debt settlement regulations, it’s important you first understand existing federal rules.
Federal Debt Relief Services Law from 2010: Also known as, The Telemarketing Sales Rule (TSA)
- Prohibits national debt settlement companies from charging up-front fees. Debt reduction companies cannot charge fees before an account gets settled, and at least one payment is made on that settlement.
- Requires a trust account (or a dedicated savings account) to be set up for the funds to accumulate in, as monthly payments are made by the consumer. The debt settlement company cannot control this trust account, it must be in the consumer’s name. This cannot be the consumer’s regular bank account either, it must be a separate account created for the sole purpose of the program. In this account, funds accumulate. After the negotiators solidify a settlement and the consumer agrees to the terms, at that point the funds are released from the trust account and paid directly to the creditor. The debt negotiation program fees can then be drafted from this trust account. Try this debt settlement calculator to get an idea of the cost of a debt settlement program.
- Prohibits debt settlement companies from locking consumers in a contract, similar to how credit card companies operate. As a result, consumers are never locked into a debt relief program contract and can cancel at any time.
- Requires debt settlement and credit card relief companies to provide full disclosure, including a breakdown of all fees and costs associated with a debt settlement program. In addition, companies must clearly explain: 1.) How long will it take for the client to get results (i.e., settle each of the consumer’s debts), including an estimate for when each debt will get settled 2.) The total cost of a debt settlement program, including a detailed breakdown of fees versus the estimated cost (settlement amount) 3.) The negative consequences that could result from using debt relief services 4.) Details about the client’s dedicated account (i.e., trust account).
- The potential downsides of a debt settlement program must be clearly explained and illustrated to the consumer. The downsides include that debt settlement can negatively affect credit scores because creditors are not paid monthly, and settlements occur only after a third-party collection agency takes over the account. Creditors can issue a lawsuit against anyone not paying their monthly payments in full every month, no matter if they are enrolled in a debt settlement program or not. Tax consequences can result from a settled debt. Late fees and interest can accrue increasing balances before settlements occur. Creditor harassment can happen, even after creditors are notified that an attorney is representing the consumer. Creditors are not obligated to settle a debt at a certain amount.
- The TSA prohibits debt settlement companies from making false or unsubstantiated claims about their services. For example, companies can’t guarantee to settle a debt at a certain percentage or promise to wipe away or eliminate debt for pennies on the dollar. Debt settlement companies must use realistic claims based on past results, not based on “cherry-picked” best-case scenario results. The FTC states, “Use appropriate sampling techniques, proper statistical analysis, and safeguards for reducing bias and random error.”
Assembly Bill 1405, the new California Consumer Financial Protection Law, will implement additional regulations and clauses to the existing federal Debt Settlement Consumer Protection Act from 2010.
When does the new California Financial Protection Law Take Effect?
The California Debt settlement practices bill took effect on January 1st, 2021. However, the Department of Financial Protection won’t start tracking debt settlement companies in California until 2023.
This California bill mimics some of the national rules under the Debt Settlement Consumer Protection Act of 2010, applying them to California-based companies. Also, new rules like giving customers a three-day “cooling off period” before the contract takes effect have been added.
The New California Law: the AB 1405, Wicks. Debt settlement practices bill will do the following:
- 1.) Define “debt settlement provider” as a person who, for compensation and on behalf of a consumer, provides debt settlement services
- 2.) Prohibit a debt settlement provider from engaging in fraudulent, deceptive, or misleading acts or practices, as specified, when providing debt settlement services. Consequently, California debt negotiation companies will be under a magnifying glass and consumers will have more leverage in winning cases if they have legitimate complaints.
- 3.) Require a debt settlement provider to provide a consumer with certain disclosures along with an unsigned copy of the proposed written contract between the debt settlement company and the consumer. Again, companies are already required to provide full disclosure, so the new California law will merely give lawmakers the ability to enforce penalties with ease, making debt relief companies liable for their negligence. And before consumers sign a debt settlement program contract they will be given the right to review it (i.e., the unsigned version of the contract) first. The new law emphasizes the guidelines and requirements that companies must comply with, ultimately making it a safer program for consumers and eliminating unreputable and illegally operating companies from the marketplace.
- 4.) Allow California residents enrolled in a debt settlement program to terminate a debt settlement contract at any time without a fee or penalty, simply by notifying the debt settlement company. The new California law makes it clear that consumers are under no obligation to remain in a debt settlement program just because they signed a contract.
- 5.) Require a payment processor, upon notice of cancellation from the consumer or debt settlement provider, to stop accumulating service fees, close the settlement account, and deliver the balance of the settlement account to the consumer within seven days. In the past, consumers would struggle to cancel their debt settlement contract and then afterward have a brand new headache trying to close their trust account and get their money back. In some cases, it would take months to get their funds delivered back from their trust account to their bank account. Thousands of complaints online exist from consumers that had canceled their debt settlement program and the payment processor continued drafting fees. Profit-driven debt consolidation programs would purposely make it difficult for consumers to cancel, requiring them to go on a goose chase before canceling. Similarly, some credit card companies do the same.
- 6.) Require the debt settlement provider to immediately forward any notice of a lawsuit or settlement agreement to the consumer, as provided. Lawsuits and settlement offers are time-sensitive items. The law wants to make sure companies are prioritizing these time-sensitive items. In the past, companies would fail to respond to a summons in a timely manner resulting in the consumer receiving a judgment.
- 7.) Authorize a consumer to bring a civil action for violation of these provisions. California debt settlement companies are now more liable for negligence, as lawmakers have more legal authority.
- 8.) Authorize statutory damages of not more than $5,000, actual damages, injunctive relief, and other relief the court deems proper.
- 9.) Require that a court award costs of the action and reasonable attorney’s fees for any successful cause of action.
- 10.) Specify that reasonable attorney’s fees may be awarded to a prevailing debt settlement provider or prevailing payment processor upon a finding by the court that the consumer’s prosecution of the cause of action was not in good faith. Wrongful accusations from the consumer can result in a penalty on their behalf.
- 11.) Specify that a debt settlement provider or a payment processor (not be) civilly liable under specified circumstances. Again, the bill also offers protections to California debt relief program providers.
- 12.) Require a cause of action to be brought within four years of specified dates.
- 13.) Provide that a waiver of its provisions is contrary to public policy and that its provisions are severable.
- 14.) This bill does not include law firms that do not charge for services regulated by this title or who are retained by a consumer for legal representation in consumer debt litigation. For example, suppose a consumer gets sued and hires a law firm to assist them in dealing with the lawsuit. Even though the lawyer may negotiate a settlement on the consumer’s behalf as a debt resolution, the law firm is not under the same rules as a debt settlement company. Keep in mind, attornies can charge an hourly rate or flat fee when retained, like if being hired to help fight a debt lawsuit.
The Wicks Debt settlement practices bill, a Democratic bill, gets approved despite opposition
This California democratic bill was approved despite almost unanimous opposition from Republicans. In addition, several lobbies have removed their opposition after successfully pushing for amendments, including one that would remove regulations around referral fees, a significant source of income for the industry.
But before the most recent amendments, the debt relief industry had coalesced in opposition to the bill.
The Consumer Debt Relief Initiative maintained that the new debt settlement law would harm the same people the bill is trying to protect by driving out debt reduction companies from California. As a result, consumers would be left with fewer options and be forced to file for bankruptcy in many cases, was their argument.
This new debt settlement law is another step in the right direction to clean up the debt settlement industry and eliminate the California debt relief companies that operate fraudulently.
How do the best debt relief companies operate?
When it comes to helping people with their financial situation, the best debt settlement companies have multiple options available for the consumer. These options should include debt consolidation loans, financial hardship programs (i.e., debt settlement), consumer credit counseling, and credit repair.
Debt relief companies can then ensure consumers are enrolled in the best debt relief service based on each person’s financial goals and needs.
One of the main goals of debt relief programs is to help a person avoid having to file for bankruptcy, providing an affordable debt repayment plan. However, if a consumer joins a debt settlement program and then has to cancel halfway through it, bankruptcy may be their only option left.
Golden Financial Services, Debt Settlement in California
AB-1405 Debt settlement practices, California Legislative Information