California Debt Relief Programs: How Do They Work?

California Debt Relief Programs: How Do They Work?

 Key Takeaways:

  • California is one of the more expensive states for living, and Californians carry an average credit card debt of $5,635.

  • There are many government, charitable and private solutions for California debt relief. 

  • Debt settlement in California can help you get out of debt sooner.

If you live in California and struggle with debt, you’re not alone. California is a uniquely expensive place to live, making it difficult for many people to make ends meet.

Fortunately, there’s hope for people who aren’t sure how they’re going to make their credit card payments. California debt relief programs include various options to make those credit card bills more affordable and keep debt collectors off your back. 

The High Cost of Living In California Contributes to Credit Card Debt

Why are California debt relief programs so important right now? 

As you’ve probably noticed, California is a costly place to live. Couple that with the financial toll caused by the COVID pandemic, and many people in the Golden State have been left feeling overwhelmed by debt.

Here are some not-so-fun facts about why it’s so hard to survive financially in California:

  • The median wage in California is nearly 13% more than the national median. That sounds pretty good until you realize that the median housing cost in California is 52% higher than the national median.

  • Home prices in California have risen beyond the means of typical workers. The median home value in California of $568,500 is more than twice the national median.

  • California has more than three times as many million-dollar properties as any other state. That’s great if you’re trying to promote a reality TV series, but not so good if you’re trying to break into the housing market. 

  • Homes in California are especially expensive in its cities. Eight of the ten priciest home markets in the country are in California.

  • Those high home prices leave many Californians with no choice but to rent rather than buy, but renting is no bargain either. California also has eight of the ten most expensive cities for renting a two-bedroom home or apartment.

  • It’s not just renting that costs a lot in California. According to information from the World Population Review, California’s overall cost of living is 38.5% higher than the national average. 

Given all these expenses, it’s not surprising that California's average credit card balance is $5,635, according to data from Experian.

Carrying that credit card balance requires a regular stream of monthly payments. That would take a big enough bite out of a budget under normal circumstances, but then COVID hit. 

COVID’s Toll on Finances in California

In the first months of the pandemic, California lost more than 2.6 million jobs, according to figures from the Bureau of Labor Statistics. 

Even with several months of economic growth since then, employment in California is still more than 700,000 jobs shy of where it was in January of 2020.

On top of high credit card balances and other significant financial obligations, these job losses have had devastating effects on Californians. 

Understandably, many people have fallen behind on paying their bills. Some are too busy fending off debt collectors to figure out how to bounce back from all this. 

Consumer Debt Protections in California

When dealing with people you owe money to, it helps to start by knowing your rights. 

California provides consumers with some special protections from debt collectors. 

Nationally, all consumers are protected by the Fair Debt Collection Practices Act. This is a federal law that bans debt collection agencies from certain harassing behaviors, including:

  • Using threatening or abusive language

  • Contacting consumers between the hours of 8 am and 9 pm

  • Making debt collection calls at work unless permitted by the employer

  • Contacting friends and family about a person’s debt

Notably, this federal law only covers debt collectors hired to work on behalf of creditors. That means it does not apply to original creditors themselves. However, a California law called the Rosenthal Fair Debt Collection Practices Act takes the extra step of extending limits on debt collection behavior to original creditors. 

This means that credit card companies you owe money to must follow the same rules as third-party debt collectors.

Also, a new law in California called the Debt Collection Licensing Act required all debt collection firms to apply for a special license by December 31, 2021. This license brings them under the state government’s Department of Financial Protection & Innovation supervision. The change gives consumers a place to go to get information about debt collectors and air complaints.

As another resource, the California State Attorney General’s office provides detailed advice for consumers dealing with debt collectors.  

Finally, note that debt collectors may continue to approach you about old debts, but they can’t sue you for those more than four years old. California’s statute of limitations bars legal action after four years on debts taken out according to a written contract and after two years for those based on an oral agreement. Virtually all credit card debt is based on a written contract.

Some jurisdictions have extended the statute of limitations because of court backlogs caused by COVID.

Debt Strategies in California

Consumer protections can keep debt collectors from harassing you, but if you still owe money, you’ll have to figure out how to deal with it. This is where debt relief programs come into play. 

You may want to pursue less drastic options before opting for debt relief. Thos include:

  • Minimum payment reduction. Credit cards generally require you to pay a certain minimum amount every month. If you’re having trouble making those payments, you could negotiate to reduce the minimum payment. Be advised that this could be more expensive in the long run because it will take longer to pay off your debt. 

  • Collection forbearance. If you can make the case that your financial difficulties are temporary, you may be able to have payments suspended for a while. This will buy you some time to get your finances together before you resume making payments. Note that if you’re still being charged interest during the forbearance period, your debt would be higher at the end of that period than when it began. 

  • Reduced interest rates. If you can negotiate an interest rate reduction, it’s a great solution because it could lower both your immediate payments and the long-term cost of your debt. Unfortunately, people in financial difficulty often see their interest rates go up rather than down due to falling credit scores. 

  • Waiver of late fees. If you can get a creditor to give you more time to pay your bills, make sure the agreement includes waiving the usual charges for late or underpayment of those bills. Otherwise, the long-term problem will just get worse.

  • Credit counseling. Nonprofit credit counselors can help you budget. They may negotiate lower interest rates with your credit card companies and formulate a debt management plan (DMP) to help you pay off your debt. However, they won’t typically negotiate with debt collectors, and they don’t reduce what you owe. Also, even nonprofit debt counselors usually charge a modest fee for their services. The California Department of Financial Protection & Innovation has resources to help you check out California debt counselors. 

Debt relief, also called debt settlement, is an agreement to reduce the amounts you owe. Creditors or debt collectors are only likely to agree to this if they are convinced there is no way you can pay the total amount due. They may decide their best option is to accept a partial amount now, rather than have the debt collection process drag on and ultimately risk getting even less if you declare bankruptcy.

Debt settlement differs from the other forms of debt relief listed above in a meaningful way. The other debt relief options you deal with the problem. Debt settlement makes some or all of your debt problems go away. 

Debt settlement typically works like this: You stop paying your creditors and direct the money into savings. This can be stressful if your creditors contact you aggressively when you start missing payments. When you have saved enough, you or your debt relief company make an offer to a creditor to settle your account. Then you repeat the process until you have settled with all of your unsecured creditors. 

You may be able to speed up the process by selling thighs you don’t need, borrowing against a 401(k) account, or taking on a side gig to put extra money towards your debt relief plan.

However, debt settlement is not good to have on your credit report, and it stays there for seven years. Your creditors are not obligated to settle with you, and they may sue if they think they can collect the outstanding balance. Plus, the IRS treats most settled debt as taxable income.  You must either pay taxes on forgiven amounts or prove that you are insolvent. 

How to Get Debt Relief in California

If you prefer to DIY your settlement attempt, start by negotiating with creditors or debt collectors yourself. Before you start, make a plan that represents a reasonable compromise between your needs and theirs. You can see a sample debt settlement offer letter at eForms. 

A for-profit debt relief company takes an active role in negotiating on your behalf if you decide that debt settlement is your best option. Debt counselors can help you develop an affordable plan and see you through the process, which can be stressful. This help comes at a price. Debt relief companies generally charge a percentage of the total amount you enroll in a debt settlement plan.

Is Bankruptcy the Right Option?

Bankruptcy should be considered a last resort after all your other attempts at debt relief have failed. 

While bankruptcy may reduce the amount you ow (and discharged amounts are not usually taxed), submitting to a bankruptcy proceeding means handing control over the process to the court. The bankruptcy judge or trustee decides what assets you must give up in a Chapter 7 filing or how much of your income you must pay out in a Chapter 13 proceeding.

Plus, the bankruptcy will stay on your credit history for ten years. That will make it very hard to get credit and very expensive when you do. In addition, bankruptcy is a public event. It can impact what you pay for insurance and can even disqualify you for certain jobs.

In the meantime, you’ll probably incur legal fees to go through the bankruptcy process. 

Get Back on Track Faster with Debt Relief

If you haven’t been able tocreate a workable repayment plan on your own and aren’t ready to take the drastic step of bankruptcy, consider working with a debt relief specialist as a middle ground.

At the very least, you should be aware of your options. You can look into professional debt relief services to see what they could do for your situation.

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