Debt Relief Options in California

Where do you go for help when you're in debt and live in California? In this article, you will read about your debt relief options and learn some of the rules and regulations that apply in California.

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Debt Statistics in California







Debt Relief Programs in California

California led the nation in Chapter 7 bankruptcy filings in the United States in the first quarter of 2022, so there are many in the state who need help dealing with their debt.

In California, debt relief is available from banks, credit unions, online lenders and debt-relief companies – for profit and nonprofit. All have specialists who offer help to solve the dilemma, especially credit card debt.

Five programs can address California debt concerns: debt consolidation loans, debt management programs, debt settlement, nonprofit debt settlement and, in the worst case scenario, bankruptcy. Each program has benefits that have to be weighed against the negatives.

Here is a look at each program to help you determine what works best if you seek debt relief in California:

Debt Management

A debt management program can reduce credit card interest rates from 18%-30% to somewhere around 8%, thus reducing the monthly payment. The program aims to eliminate credit card debt for Californians in 3-5 years.

For example, if someone owes $5,000 in credit card debt at 25% interest, they would pay $105 in interest alone each month. Drop the interest rate to 8% and the interest payment is just $33 a month. That’s $72 a month difference that could go toward paying off the balance faster.

A debt management plan is not a loan. Credit score is not a factor in enrolling.  Participants can opt out of the program at any time. However, on-time payments must be made every month, or the creditor can withdraw the interest rate concessions made to the California consumer.

» Where to find it? Plans are offered by nonprofit credit counseling agencies, who work with creditors to reduce interest rates to a manageable level. The program covers unsecured debts, like credit cards, but not secured debts, like houses or cars.

» Is it right for you? Anyone with high-interest credit card debt would be helped by this program. It not only lowers interest rates, it chips away at the amount owed until, in 3-5 years, you are free from the debt.

Debt Consolidation Loans

Debt consolidation loans combine unsecured debt – primarily credit cards — into one loan, at a lower interest rate than the loans that cause the problem.

The interest rate on a debt consolidation loan depends on your credit score and whether you are willing to put up collateral, like your home or car, to back the loan.

Typically, people put up collateral and pay around 10%-12% for a debt consolidation loan, compared to the 25% interest rate they could be paying to credit card companies. This is a single payment to a single entity, at a lower interest rate that saves money and simplifies payments. It’s a big savings, which makes this look like a really good deal. And it can be.

However, any Californian who took out a big loan to pay off a bunch of small loans still owes the same amount. If you don’t stop using your credit cards, you must pay the consolidation loan, plus whatever you’re buying with credit cards.

And that’s if you qualify for the loan; a poor credit score could eliminate you.

» Where to find it? Most banks, credit unions and online lenders offer debt consolidation loans, provided you meet the credit score standards. It’s always wise to check for the lowest interest rate and best terms you can find.

» Is it right for you? Anyone with a good credit score (670 or higher) and the discipline to stop using credit cards would be wise to consider this option. Generally, California consolidation loans offer a lower interest rate than the burdensome rates charged by credit card companies.

Debt Settlement

Debt settlement is an option in which a consumer pays less than what is owed, usually in a lump-sum payment. This may sound good, but it can be a long process and consumers must realize that it puts a damaging mark on their credit report for seven years.

The consumer, or more likely a company he/she hires, must negotiate a payment amount agreeable to both parties. In some cases, the California consumer will pay  half of what was originally owed. However, when fees and late payment penalties are factored in, the more accurate count is they pay about 25% less.

The benefit to the credit card company is that it receives some money, as opposed to little or nothing if the consumer defaults.

The negative is that debt settlement will stain your credit report for seven years. Also, the IRS considers forgiven debt of more than $600 as income that must be declared on your tax return.

» Where to find it? Debt settlement is offered by for-profit businesses who specialize in this service. They negotiate on your behalf with the credit card companies, who must agree to the plan before it goes forward. The process usually takes 2-3 years and card companies are under no obligation to accept settlement offers.

» Is it right for you? Anyone in California who has reached the point of not making payments because the debt is so large could benefit from debt settlement. That tells a creditor their loan is at risk, so they may well be willing to take what they can get  via a lump sum. Anyone who can’t afford the payment(s) and wants to avoid bankruptcy could consider debt settlement.

Nonprofit Debt Settlement

Nonprofit debt settlement is offered by a small number of nonprofit credit counseling agencies. Like debt settlement, it allows a consumer to pay less than what is owed, but there is no negotiating involved. Creditors agree in advance to accept 50%-60% of what is owed to resolve a debt.

The debt is repaid in 36 monthly installments.  If the consumer misses a payment, the program is canceled. California consumers can pay off the debt early, but there is no extending the payment schedule beyond 36 months. .

The advantage of a nonprofit program is that it is certified and accredited by the National Foundation for Credit Counseling (NFCC). Federal law requires the agency act in the best interest of the client.

» Where to find it? The program started in 2021, so only a few nonprofit credit counseling agencies offer it and only a few credit card companies and banks participate.  Consumers should search online using the term “nonprofit debt settlement” to find the companies that offer this program.

» Is it right for you? This is a program for consumers who face overwhelming credit card bills, but don’t have the income to pay them off. You won’t have to pay any interest on the debt, as long as you keep up with the 36 monthly payments it takes to get through the program.


Bankruptcy is a last resort for those in debt in California, but for some it might be the best approach. Bankruptcy is painful, but it does give consumers a second chance to get their finances in order and it can be done without losing many of your possessions, including your home.

There are two types of bankruptcy. In Chapter 7 bankruptcy, non-exempt assets are sold by a trustee appointed by the court and the money is used to pay off debt. Many assets are exempt from this process, notably your home, car, personal items needed for work, pensions and Social Security.

In Chapter 13 bankruptcy, you keep your assets in exchange for making regular payments to the trustee to pay down debt.

The consequences for bankruptcy are significant. Your credit score may drop between 100 and 200 points, depending on where it was when you started. Bankruptcy also stays on your credit report for 7-10 years, making it more difficult to get credit for a California home or car loan in the future.

» Where to find it? You must file for bankruptcy at a federal bankruptcy court. It’s always wise to consult an attorney when filing bankruptcy. He or she knows the ins and outs of the system and can protect you and your family as much as possible in the process.

» Is it right for you? Take a look at your income and expenses. If you can’t figure out a way to pay off all your debts in five years, bankruptcy might be the best debt-relief option available. It’s always best to try nonprofit counseling, settlement or consolidation before bankruptcy, but if those are not for you, bankruptcy lurks as the final resort.

Statute of Limitations in California

The statute of limitations for consumer debt in California is four years. That means a creditor cannot prevail in court after four years have passed, which essentially makes the debt uncollectable. Some businesses may try to entice Californians to re-open an old account; if they do and they have old debt, the debt is re-activated once a payment is made and a creditor has another four years to sue for the money. This is referred to as reviving an old debt, so California consumers with debt past the four years should be careful and wary of “attractive” offers to re-open an account.

Debt Collection Laws in California

California has a state version of the federal Fair Debt Collection Practices Act, which prohibits a debt collector from using false, deceptive or misleading representation about a debt. California’s law prohibits “unfair or deceptive acts or practices in the collection of consumer debts.” It also regulates when debt collectors can call, and perhaps most important that they abide by your request if you ask them not to call you. The Rosenthal Fair Debt Collection Practices Act provides more protections to California consumers, including giving them the ability to file a complaint with various government agencies, to file a lawsuit against a collector, and to use violations of the law as leverage to settle the debt.

More Debt Statistics in California

Homeowners in California took advantage of historically low interest rates the past couple of years. Mortgage debt in the state in 2020 was at $143.15 billion dollars. Projections had that increasing to $172.79 billion by 2026.

Here’s a quick look at other debt and economic numbers about California:

  • Student Loan Debt: In pure numbers, California leads the nation in cumulative student loan debt, with $142.7 billion. But that large number is because of the state’s large population. Taken per capita, the figure is $36,397, which ranks 16th in the country and is far behind the $55,077 owed by the average borrower in the District of Columbia.
  • State Debt: The state itself is in the red. California’s state debt was at $143 billion during 2020. It is projected to increase to $172.79 billion by 2026.
  • Identity Theft: California had 147,382 reports of identity theft in 2020. But when population is factored in the state had 373 reports per 100,000 residents – 15th in the nation. Kansas led the country with more than 1,400 reports per 100,000.
  • Credit Cards: In 2021, California residents carried an average of 5.9 credit cards with average debt of $6,729, a 31% increase from 2020. Lending Tree ranked that 14th in the nation and $160 higher than the national average.
  • Debt Collection: The state’s Debt Collection Licensing Act took effect Dec. 31, 2021. The law mandates that debt collection agencies and collectors must apply for a license to operate in the state, giving the state a way to monitor and track unscrupulous collectors.
  • Credit Score: The average national FICO credit score is up to 716. California is above the national mark, though, at 721.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].


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