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How to Settle Your Debts in California

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In a Nutshell

To evaluate whether a debt settlement is right for you, you have to gather and analyze information about your income and expenses to determine whether your budget can afford payments into an escrow fund. Then you have to choose who will negotiate settlement of your debts. 

Written by the Upsolve Team
Updated March 26, 2021

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A California debt settlement means paying less than the total amount owed for a debt. A reduction in the outstanding balance of the debt creating a smaller and more manageable debt amount. It is done through payment by lump sum or payment through a very short term installment plan. Creditors prefer lump-sum payments over installments since it minimizes the risk of you missing any more payments. 

A California debt settlement is just one way of stabilizing your personal finances. It’s seriously worth considering as one of your debt relief options, especially if your credit score is already pretty low. It can be done through a debt settlement company or even by yourself on your own time. During this debt settlement process, you make a settlement offer to each creditor and agree to a settlement plan that you can afford. If you can’t do it yourself, a debt settlement company can negotiate a settlement agreement for you. Most debt settlement programs work by setting aside money to negotiate with, then making settlement offers one debt at a time. When you have paid enough into this fund to accumulate enough for a lump-sum, the debt settlement company begins debt negotiations by contacting your creditor with a payment offer. Once you and your creditor have agreed to a settlement amount, you make monthly payments to build up a settlement fund until you can make the full amount of your negotiated payment. 

Many people settle by paying as little as half of the amount they owe. However, settling a debt, even with the creditor’s full approval, will result in an entry on your credit report that the creditor received less than the balance owed, which will have a negative impact on your credit score.

If you’re getting collection calls from debt collectors for unsecured debt like medical bills and credit card debt, or student loans are making your monthly payments unaffordable, there are realistic solutions available to help you rebound from your current, temporary financial distress. There are credible, ethical companies willing to help you in different ways at no cost. Debt relief without filing bankruptcy is a realistic option worth considering, regardless of the types of debt that you may have. You can have a poor credit score and still find help and options.

It’s important to fully disclose all of your debts if you’re using a debt settlement company so the company can provide you with the necessary information to determine which of your debts are best suited for settlement.

You should be at least 90 days late before talking to a creditor about a debt settlement. 

It can work if you have the ability to pool enough money or sell enough property to make lump-sum payments. Also, you should have a manageable number of creditors. If you have too many debts or too few resources to save for a lump-sum, debt settlement may not be the best option for you. Credit cards and other unsecured debts are ideal for debt settlement since there is no collateral involved, which is why secured debts are excluded from most debt settlement agreements.

Keep in mind that the creditor won’t get any payments while you’re building the account up to make an offer. During this time, the creditor will likely report your missed payments to the credit bureaus, may turn your debt over to a collection agency, and may even sue you. A debt settlement always works the best if funds are available or assets are easy to liquidate. Making a  lump-sum offer to your creditors is the quickest way of resolving debt.

Learn More Through Free Nonprofit Credit Counseling 

A credit counseling agency can help anyone in debt. When your financial situation becomes unmanageable, consulting with a credit counseling agency should be your first course of action. Credit counselors have the training in financial management to provide the pros and cons of a debt settlement and whether it’s a good fit for your personal set of circumstances.

Credit counseling agencies and credit counselors help consumers understand their financial situation so they can take active measures to improve it for the future. Trained and certified credit counselors work personally, one-on-one, with consumers to identify their financial weaknesses. These professionals can help you find solutions, set short term and long term goals, and form an action plan to achieve these goals. Credit counseling agencies may offer additional services based on the results of the counseling session.

Credit counseling agencies offer debt management plans, a form of debt consolidation, but do not offer debt consolidation loans since they’re not financial institutions. At the end of your consultation, the credit counseling agency will make a recommendation that may include a debt management plan, if you qualify. Maybe a debt settlement with each creditor for an amount less than what you owe is your preferred type of debt relief. The credit counselor should tell you whether a debt settlement is right for you and why. If not, ask.

How to Settle Your Debts in California 

To evaluate whether a debt settlement is right for you, you have to gather and analyze information about your income and expenses to determine whether your budget can afford payments into an escrow fund. Then you have to choose who will negotiate settlement of your debts. 

Collect Details About Your Debts 

Next, gather the details about not only the debts you want to settle but even those debts you have no intention of settling through a debt settlement. Fully disclosing debts in this way will give credit counseling agencies, lenders, and any of your creditors a complete picture of your financial situation.

Collect information regarding the current balance, interest rate, and monthly payment amount for each debt. Maybe you just want to settle unsecured debts, but, if not, categorize your debts by secured v. unsecured, student loan v. non-student loan, and figure out monthly payment totals for each category.

Getting a credit report before you do this is a great way to simplify the process. If you’re in default on any debts, they may have been sold or assigned more than once since the date of default. Getting a credit report helps get a good overall picture of each creditor and the balance of its debt, including the amount that’s delinquent. Once you’ve examined all the information contained in your credit report, you can see what debts, if any, are a good fit for settlement.

Collect Details About Your Ability to Settle Your Debts 

You really can’t start to consider debt settlement as an option for debt relief until you determine your monthly income and expenses. You have to create a workable financial plan for a definite period, which is your budget, consisting of your income, expenses, and any remaining disposable income.

Anyone earning regular wages paid weekly, every two weeks, or twice a month, can use their paycheck stubs to determine income. Any that are representative of a typical work week, ideally the two most recent ones, should help you determine the amount of income in your budget. You can find out the frequency of your pay on your paycheck. If you worked a lot of overtime, this has to be considered in the overall picture if it isn’t representative of a typical paycheck.

Anyone with non-regular employment income or non-employment income will have more of a challenge calculating income. Any money in-pocket and its source is used since income doesn’t have to be taxable to qualify for your budget, just available to pay living expenses. When figuring out expenses, divide them into fixed and variable expense categories. Whatever remains after paying these expenses is the amount available to pay creditors. 

If little to no money is left over after paying expenses, debt settlement is not a good option since there is not enough disposable income to make monthly payments that will build into any lump-sum agreed-upon settlement amount. Ask your credit counselor about how your disposable income, when compared to your total amount of debt, impacts the likelihood of successfully settling all debts.

Learn About the Costs to Settle Your Debts in California

If you hire a debt settlement company to resolve your debts, there may be fees for using this service. If you don’t hire a debt settlement company, you will continue to incur late fees on any account where you are missing payments or making them late. You will continue to incur other fees and penalties related to default on your account. One of the purposes of a debt settlement is to reduce or completely eliminate these types of costs, which can accumulate at a quick pace. 

The fee structure of a debt settlement company may be based on a percentage of your total debt or your total savings. The latter is less expensive and provides the debt settlement company greater incentive to get the best settlement possible for you.

Decide Whether to Work with a California Debt Settlement Company 

Before hiring a California debt settlement company, consider that you can negotiate a debt settlement yourself with no professional assistance. If you’re good at organizing and tracking information and not afraid to negotiate or argue, there is every reason to believe that you can obtain a debt settlement yourself. 

If you settle your debts on your own, you save any fees charged by a debt settlement company.

You also are in complete control of the entire process. You learn everything directly as it happens rather than waiting to hear from your agent or “middle-man.” Any creditors who refuse to work with a debt settlement company may be willing to work with you.

The drawback of negotiating your own debt settlement is that a substantial amount of time and effort is required. While you’re in total control, you also have full responsibility for attending to everything related to the settlement as it occurs. It may overwhelm you at some point and interfere with your everyday life.

Another possible negative effect of negotiating a debt settlement alone is that you may lack time to deal with every creditor. A debt settlement may be considered unsuccessful if you’re unable to settle with all your creditors. Finally, not having any insider information about a creditor and what it may accept may prolong the process.

Research California Debt Settlement Companies 

Be careful before you sign up with any debt relief company. They’re required by law to give you specific information about the debt settlement program. This information includes the price, terms, and timetable of results. All fees and any conditions on services must be explained to a consumer. The company must also inform you how many months or years before it will make a settlement offer to each creditor. This includes the amount of money or the percentage of each debt necessary for you to save before it makes an offer to a creditor.

The company must tell you about the possible negative consequences of nonpayment if it requests that you stop making payments to your creditors — or if the program relies on you to not make payments. These possible negative consequences include damage to your credit report and credit score, the possibility of a lawsuit, continued collection efforts, and that a creditor may charge you additional fees and interest.

The debt relief company also must tell you that you may withdraw your money at any time without penalty; the accumulating funds are your property and you are entitled to any interest earned. Keep in mind that the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees.

If a debt settlement company makes guarantees or charges fees before settling your debts, it may not be a reputable business. Consult with the Better Business Bureau or other consumer protection organizations to find out about trustworthy, qualified debt settlement companies. 

California law requires that nonprofit organizations that arrange or administer debt settlement plans, defined as “a method of paying debtor’s obligations in a negotiated amount to each creditor on a one-time basis,” can’t charge a fee that is more than 15 % of the amount of the debt forgiven. Nonprofit community service organizations can’t require any upfront payments or deposits on debt settlement plans and may only require payment of fees once the debt has been successfully settled.

California law also prohibits debt settlement companies from charging or receiving any payment before the full and complete performance of the services that it has agreed to perform for you . A debt settlement company also violates California state law if it fails to perform the agreed-upon services within six months after you sign a contract with them. 

You may want to search the California Attorney General’s Office for any complaints about the company. California also has a statute that mirrors the federal Fair Debt Collection Practices Act (FDCPA) in many ways.

How to Make Your Debt Settlement Work 

Once you’ve considered all your options and you’ve chosen a debt settlement program that works for you, it’s crucial to pick a sensible, workable payment date. You may want to isolate this payment and separate it from your mortgage/rent, or even car, payment, if possible. 

If enough money is available, it’s wise to set aside a certain amount of per month for emergencies in your budget. Make sure you account for occasional but expected expenses before spending on variable expenses such as entertainment costs. Most people would even make extra payments when possible - but not at the expense of their emergency fund.

If you can’t budget for an emergency, you can use a credit card with a reasonable interest rate  to pay for it and minimize its impact on your budget by setting up a mini-monthly payment plan that you can repay as quickly as possible. Keep in mind that using credit cards while settling accounts with other banks may be seen by a creditor in a negative light. This could impact the settlement offers you receive. Also, the other creditor may see that you’re settling other accounts and close your account or drop your available credit. This is for the purpose of reducing their risk of loss.

Alternatives to Debt Settlement 

When you can’t find a debt settlement program that works for you, or maybe you just don’t qualify for a California debt settlement, there are other solutions that may still help you find debt relief. 

California has a vast number of well-established credit counseling agencies. Meeting with a CCA is beneficial because they’ll make you more well-informed for any consolidation offers or debt management plans. Continue to consult with the credit counseling agency that helped you consider any settlement offers or referred you to any settlement programs. This will allow you to consider the kind of debt relief that’s right for you, and any for which you qualify. 

You can make a difference in solving your financial problems. There’s also a wealth of free assistance available that is accessible online and near your location. 

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California Debt Consolidation 

When debt settlement isn’t available for whatever reason, consider a California debt consolidation loan. Terms like “debt settlement,” “debt management,” and “debt consolidation” are confusing to most consumers. These terms can even confuse some lawyers as to what type of debt relief is specifically provided by each term.

The goal of a debt settlement is the partial payment of your debts. However, a consolidation loan and debt management plan both aim for full payment at better payment terms. Both eliminate all your individual monthly debt payments. The result is one, and only one, monthly payment to service your debts. 

Both a consolidation loan and a debt management plan may be effective ways of reducing debt. A home equity loan or credit card balance transfer may provide the necessary debt relief. It’s also a good idea to investigate whether a California debt management plan may help. 

California Debt Management Plan 

Don’t forget that a California debt management plan may be the method of debt relief that best works for you. Unlike a debt consolidation, which involves a loan, a debt management plan is not a loan. You don’t need a high FICO score to qualify for a debt management plan. If you do qualify, remember it’s possible if you look hard enough to find a plan with decent payment terms. 

A debt management plan uses an affordable payment schedule. After you make enough regular, monthly payments, your debt management company will forward this money to your creditors in a lump sum payment.

California Bankruptcy 

After considering debt settlement, debt consolidation, and debt management, consider meeting with an experienced bankruptcy attorney. Most California bankruptcy attorneys will provide a free initial consultation. Upsolve can also help if you’re considering bankruptcy, whether you want to file with the help of a bankruptcy attorney, or you want to file pro se, without an attorney.  

And if you can’t afford a bankruptcy attorney and you aren’t eligible for a debt consolidation loan or a debt management plan, Upsolve can help you file a Chapter 7 bankruptcy case. We’ll give you the forms necessary for filing, and one of our experienced bankruptcy lawyers will review them for accuracy once you complete and return them to us. If the forms are accurate, then they’re ready for filing. If you need or want an attorney, Upsolve will refer you to a competent bankruptcy lawyer in your area.

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

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