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First things first, California is not alone when it comes to personal debt. Approximately 9 million American reach out to organizations that can help them resolve debt, and many of these agencies work with debt settlement as one approach.
California is careful about how these organizations operate. Agencies must be registered with the state, and the Department of Corporations closely monitors all activity in this regard. Begin by checking that any credit counseling firm in question is properly licensed. The state posts its roster of approved agencies online.
When To Use It: While credit counseling in general is a prerequisite for debtors before they file for Chapter 7 or Chapter 13 bankruptcy, debt settlement is not. It is an option best suited to those who want and have the means to put a balanced owed behind them in one fell swoop. Successfully paying off a debt goes a long way toward improving one's credit rating.
How It Works: What debt settlement means for consumers is that an intermediary, often a nonprofit state-registered credit counselor — but sometimes an attorney or public accountant — negotiates a one-time payment with a creditor that is less than the full amount owed. The debtor sends the agreed-upon amount to the counseling organization, which then delivers it to the party to which the money is owed.
California Only: As of 2011, the fee that a third party can charge consumers for enacting a debt settlement plan is limited to 15% of the amount saved under the terms of the negotiated payment. Note that if you are handling debt settlement through a lawyer instead of a nonprofit counselor there may be additional legal and filing fees attached to your plan. There are also other kinds of fees that an organization may impose, such as $50 "education" charges. Be certain to find out up front what your agency charges for the services rendered. Also, take into account that the amount forgiven under a debt settlement place is almost always treated as taxable income at tax time.
California has rules that protect consumers all the way through debt-management and debt-settlement. The Department of Corporations maintains an advice line at 1.866.ASK.CORP, and encourages users to use it to answer further state-specific questions that may come up.
It's estimated that some 9 million Americans reach out to a credit counselor every year. In California, credit counselors are overseen by the state Department of Corporations. Under the state's financial code (Section 12100–12108), only registered agencies within the state system may offer debt-management and debt-settlement plans. Start by seeing if the counselor in question is properly listed.
Once you confirmed that you're working with one of these, what follow are some key points to effecting a successful credit counseling arrangement.
When To Use It: Credit counseling is a state requirement before you can file for either Chapter 7 or Chapter 13 bankruptcy. In both cases, you must complete a credit counseling course that's been approved by the U.S. Trustee's office. Whether you're filing for bankruptcy or not, what credit counseling offers is a chance to make good on debts and establish a stronger credit history going forward. You won't wipe out a rough credit history, but you will be on the path to restoring your credit rating -- staying out of bankruptcy, which can have devastating long-term effects on your ability to borrow later in life, to rent or finance property, and in some cases can even create barriers to getting a job.
How It Works: When consumers enter into a credit counseling agreement, they're essentially approaching a third party nonprofit agency for help in negotiating lower interest rates and reduced payments on the money they owe to creditors. These plans, often lasting for several years, require the consumer to deposit money with the credit counseling service every month, all the while agreeing not to apply for or use any additional credit. A credit counselor may also help you settle a debt outright with a creditor.
Just For California: The state of California limits how much a credit counseling service can charge you for the work they perform: 8% of what you pay to your creditors monthly, or $35, whichever is lower. If they work with you on a debt-settlement plan, as opposed to repayments over time, then they can charge you up to 15% of the amount forgiven. California credit counselors may also apply a $50 fee for "education" to either kind of plan.
Not sure what option is best? Use our online form to contact us for help.