California Debt Consolidation



As recession took its toll on the economy, the population of California, like their counterparts in other states, is faced with numerous problems ranging from unpaid credit card bills to foreclosed homes. Unfortunately, people who are facing economic difficulties are typically the target of unscrupulous operators who are after fast bucks by promising anything from credit repair to lowering one’s debt by half, in not totally eliminating them.

In order to avoid being victimized by these scammers, the State of California offers, through the facilities of the state government, and private or non-profit organizations, assistance to its population in various areas of economic concerns such as debt consolidation, credit counseling, mortgage assistance, credit repair, and debt relief.

California Debt Consolidation & Credit Counseling

Californians who are drowning in debt and whose debt to credit ratio has hit above 50% have two options to get out of the mess: debt consolidation and credit counseling.

While declaring bankruptcy is a widely known option taken by many, people do not understand the harm bankruptcy can do to their future. Debt consolidation provides a way out of debt and gives the person more control over his finances more than bankruptcy does. Debt consolidation works by taking the existing debts and placing them into a single loan. The debt consolidation company uses the loan to pay off all the debtor’s monthly bills and negotiate to lower interest rates with the creditors. Debt consolidation can also reduce monthly payments so that the debtor can have the ability to pay what he owes each month without having to struggle much. It also allows the debtor to put more of the money towards reducing the debt instead of using it to pay off interest. By securing lower interest rates from the creditors, a debt consolidation company helps the debtor make sure that his money goes to getting him out of debt instead of paying over top fees.

Credit counseling aims to help people on managing their money and debts by offering educational materials and workshops in the areas of consumer credit, money and debt management, and budgeting. Credit counseling services typically include debt counseling, how to fix bad credit, credit repair, and credit card relief. Credit counseling services are usually provided at no cost by non-profit consumer credit counseling agencies.

During the initial counseling session, financial information that includes credit card and other unsecured debts is evaluated in order to obtain an accurate assessment of the debtor’s actual financial circumstances. The counselor then carefully analyzes the financial situation in order to develop a reasonable budgeting plan that will enable the individual to develop a solid financial framework that will enable him to track spending, set aside money for emergencies, as well as for repayment of existing debts.

California Government Debt Relief Programs

Californians who do not want to resort to debt consolidation as a solution to their debt problems and who feel that they are already pushed against the wall have another option – bankruptcy.

Bankruptcy is a legally declared impairment of ability by an individual or organization to pay its creditors. Bankruptcy proceedings are litigated and supervised by the U.S. Bankruptcy Courts, which are part of the District Courts. A United States Trustee handles many of the supervisory and administrative duties of bankruptcy proceedings which are governed by the Bankruptcy Rules promulgated the by the U.S. Supreme Court.

The two basic types of Bankruptcy proceedings are:

1.  Chapter 7 filing – It is the most common type of proceedings that involves liquidation of debts. A trustee is appointed who collects the non-exempt property of the debtor in order to sell it and distributes the proceeds to the creditors. Most Chapter 7 filings cover credit card debts and the creditors typically get nothing. After the assets had been liquidated and given to the creditors, most of the remaining debts are cancelled to give the debtor a “fresh start”.

2.  Chapters 11, 12, and 13 filings – These filings involve the rehabilitation of the debtor whose future earnings will pay off the creditors.

Bankruptcy proceedings can be initiated voluntarily by the debtor or it could be initiated by the creditors. Once bankruptcy proceeding has been filed, creditors are no longer allowed to seek to collect their debts outside of the bankruptcy proceedings. The debtor, on the other hand, is not allowed to transfer property that has been declared part of the estate that is subject to proceedings. In addition, certain transfers of property, secured interests, and liens that were entered into prior to the filing of the bankruptcy proceedings may be delayed or invalidated.

California Debt Collection Laws

The life of a person who is wallowing in debt is miserable enough and is aggravated further by harassing collectors employed by his creditors. As the economy goes south and more and more people are unable to pay their debts on time, creditors utilized collection agencies to do the work for them. Most of these collection agencies collect debts for the creditor for a fee or a percentage of the total amount owed.

Collection agencies fall under three categories:

  • First party agencies which are subsidiaries of the original lending company.
  • Third party agencies which are independent companies contracted by the lender to the collect debt in their behalf for a fee or percentage.
  • Debt buyers are companies that buy debt at a fraction of the original value then collects upon them.

To protect the people of California from overly aggressive collection agencies are two sets of laws, one is federal law and the other is California state law:

1. The Federal Fair Debt Collection Practices Act

It governs debt collection practices, specifically regulating those collectors who work for professional debt collection agencies and attorneys hired to collect debts. This federal statue prohibits collectors from:

  • Communicating with debtors at unusual or inconvenient times
  • Calling the debtors at work if the debtors notify them that such is not permitted by the employer
  • Continuing to communicate with debtors after being notified to direct all communications to the debtors’ lawyers
  • Using postcards to communicate with debtors about their debt
  • Calling the debtors without disclosing the identity of the caller and the nature of the call
  • Making false representation of the amount, nature, or legal status of the debt, or use of deceptive practices to collect debt or gather information about the debtor, and
  • Applying a payment to a disputed debt without permission of the debtors when more than one debt is owed.

A consumer may dispute his debt, complain against harassment by collectors, or seek civil injunction and damages against a collector. A consumer may report violations of this law to the Office of the Attorney General to determine the possibility of filing civil or criminal actions against the collector.

2.  California Fair Debt Collection Practices Act known as Rosenthal Fair Debt Collection Practices Act

The Rosenthal Act has very specific guidelines on what debt collection agencies can and cannot do while attempting to collect unpaid debts. The Act prohibits the following actions by collectors:

  • Simulate a lawyer, consumer reporting agency, a government representative, or a law enforcement officer
  • Communicate with debtors by falsely giving the appearance of legal process
  • Use or threaten to use physical force, violence, or any other criminal means to harm the debtor, his reputation, or his property
  • Use of threat to falsely accuse the debtor of criminal acts
  • Threaten the debtor of an unlawful garnishment of wages or seizure of property
  • Communicate or make a threat to communicate with a debtor’s employer
  • Unjustifiably disclosing to other people information that may affect the debtor’s reputation
  • Making public a list of debtors or advertising a debt for sale by naming the debtor
  • Making harassing, frequent, and annoying communication with the debtor or his family
  • Using profane, vulgar, obscene, or abusive language
  • Making a false reason for contacting the debtor
  • Making a threat to turn information about the  debtor to consumer reporting agencies, and
  • Making a threat to increase the amount of debt to cover other charges except for those lawfully allowed.

California Mortgage Assistance Programs

Californians can avail of various programs from the Federal Government, California State Government and its agencies that aim to make it easy for them to buy a house or keep their house such as:

1.  California Homebuyer’s Downpayment Assistance Program (CHDAP) – It is a deferred payment, simple interest junior loan that is available up to, but not more than, 3% of the home sales price or its appraised value, whichever is less.

2.  California Foreclosure Prevention Act – It modifies the foreclosure process by providing an additional time for borrowers to work out loan modification while an exemption for mortgage loan servicers that have implemented a comprehensive loan modification program.

3.  Mortgage Forgiveness Debt Relief (Conformity Act of 2010) – This is a California law that conforms, with some modifications, to federal mortgage forgiveness debt relief for discharges occurring within tax years 2007 through 2012. The amount of indebtedness that will qualify is less than the federal amount and the state of California imposes a state limitation on the total amount of relief excluded from gross income. California limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers filing as married who file jointly, single, head of household, or widow/widower; and $1,000,000 for taxpayers who file as married filing separately. California does not limit the debt relief amount but only limits the indebtedness amount that is used to calculate the debt relief amount.

The Conformity Act of 2010 followed the example of the Federal Mortgage Forgiveness Debt Relief Act of 2007 and Emergency Economic Stabilization Act of 2008. The main idea here is that if you have property that is used as security for a debt and the property is foreclosed, you are treated as having sold the property. This may generate either a gain or a loss, and sometimes, cancellation of debt income. The above-mentioned acts provide that taxpayers are allowed to exclude from their federal taxable income the discharge of debt of their principal residence that otherwise they would be required to report.

California Government Assistance Options

The State of California offers assistance options to its populations through the following:

1.  California Consumer Services Center – provides assistance in the areas of product, privacy, financial, housing, food, and transportation.

2.  California’s Consumer Home Mortgage Information – provides help in purchasing a home, owning a home, and help with the mortgage.

3.  State of California – Office of the Attorney General – provides guidelines to consumers in the area of credit repair. As many Californians became victims of credit repair scams, the Office of the Solicitor General is constantly monitoring the activities of organizations that do credit repair business. The Office of the Solicitor General gave the following tips to people whose credit ratings are compromised:

  • Be wary of the promises of quick-fix credit repairs since there is no such thing as instant solution.
  • People having problems repaying their loans must contact their creditors to discuss options. Once an account goes to collection service, it will cause damage to one’s credit rating.
  • When arranging a repayment schedule with a creditor, make a written agreement before making any payment so that the account will be reported as current, paid off and never late.
  • Contact a credit counseling service if you need help in working out a payment plan or a budget.
  • People who are paying higher interest rates on their credit cards must consider a debt consolidation loan with lower interest rate.
  • Close inactive or old accounts as they could present a problem in getting a new loan.

People who believe that their rights have been violated by consumer reporting agencies may file a complaint with the Attorney General’s Public Inquiry Unit.  Complaints may also be filed with the Federal Trade Commission which enforces the Federal Fair Credit Reporting Act.

4.  People having problems with their mortgage can seek online help at http://www.yourhome.ca.gov/mortgage-help.shtml.  Different counties within the state of California provide mortgage help. Credit counseling are provided by HUD approved housing counseling agencies and the State of California can also provide a list of approved credit counseling agencies.

Leave a Comment