California Collection Laws
Americans live under both federal and state rules. When it comes to debt and collections, consumers that are living in California are better protected from underhanded collection practices than those in the other states. Aside from the state their debt collection rights and protection under the Fair Debt Collection Act (FDCPA), California residents also benefit from the Rosenthal Fair Debt Collection Practices Act.
What sets California collection laws apart from the other states?
The Statue of Limitations (SOL) on debt collection in California is 4 years on written agreements – calculated from the date of the breach and 2 years on oral agreements.
California has a 4-year statute of limitations on debt collections, as opposed to 6 years for most states. This means that a consumer who owes a debt from 4 years ago may not be sued for a judgment, but the creditor/lender may try. The Statute of Limitations expiration is a defense against a judgment. The consumer must show up and defend themselves, when they receive a court trial date. But, many consumers, thinking that they have no chance of winning against the creditor, don’t attend the hearing. As a result, many cases of judgment are won via a default judgment (or unchallenged).
Another advantage of living in California is that debt collection laws in other states don’t extend to some original creditors like American Express and Visa, plus some other banks, but that’s not the case in California. In California collectors and original creditors are both subject to the Rosenthal Fair Debt Collection Practices Act.
One minor set-back for consumers in California though, is that the state doesn’t allow consumers to record any type of telephone conversations. For evidence sake, the consumer may have to resort to pen and paper to have a record of the conversation with the collector. And in doing so, the consumer must take down the date, the time, the number in use, the name of the agent on the phone and any other information pertaining to the call. This way, should any issues that might arise in the future regarding the case, the consumer has everything down on paper.
Is it possible to avoid the tax consequence of debt settlement? - How to Avoid Paying Debt Settlement Tax
Consumers who are insolvent may be exempted from the tax consequences of debt forgiveness or debt settlement.
What exactly does insolvent mean?
Being insolvent is a tax category in which the consumer has declared their inability to pay taxes on the forgiven debt, and therefore must be exempted from paying the tax consequence.
Creditors that agreed to forgive more than $600 worth of debt are required to submit form 1099 to the IRS. Consumers, on the other hand, are to report the saved amount as income in their income tax return. Simply put, the IRS looks upon forgiven debt as a taxable income and failure on the consumer’s part to report it as such would be in violation of the tax code.
But if the consumer’s debt amount exceeds their assets in that period, and the amount that they are insolvent for is more than the amount that was cancelled, then they can consider themselves insolvent and may apply for the privilege of not having to pay the tax on their debt settlement.
Consumers who think they are insolvent must fill out and submit the IRS form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) together with the form 1099-C. The consumer should not forget to take note and have evidence of the cancellation date as it would play a big part in determining their insolvency. Consumers should also see a qualified tax person before filing to avoid making a mistake.
Why enroll the debt in a debt settlement program when it’s taxable?
It might be a little confusing and even upsetting for some to know that their forgiven debt is taxable. And the first thing that might come to mind is why bother with debt settlement when it’s taxable, meaning, just when they thought they’re debt free, here comes another bill?
But if the consumer would calculate or look at the whole picture, the amount that was settled for, plus the tax consequence are much cheaper compared to the overall cost of not doing debt settlement and just paying the creditor the minimum amount over the years. The interest that would accrue alone over time would exceed the cost of debt settlement. And although this may not be taken as an expert or qualified advice, the IRS, according to people that have undergone debt settlement, usually gets 25% of the settlement amount as tax. So basically, if for example, the consumer’s balance was $1,000 and the forgiven debt is 50% (or $500), the possible tax consequence if it be 25% is $250. The consumer then saves $250 in the whole settlement process. Again, this is just to illustrate and not to be taken as a professional advice.
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