AB1166 - Fair Debt Settlement Practices Act.

Amended IN Senate July 07, 2025 CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION Assembly Bill No. 1166 Introduced by Assembly Member Valencia February 21, 2025 An act to amend Sections 1788.301, 1788.302, 1788.304, and 1788.305 of the Civil Code, relating to consumer commercial debt. LEGISLATIVE COUNSEL'S DIGEST AB 1166, as amended, Valencia. Fair Debt Settlement Practices Act. Existing law, the Fair Debt Settlement Practices Act, prohibits a debt settlement provider from engaging in false, deceptive, or misleading acts or practices, as specified, when providing debt settlement services. Existing law requires a debt settlement provider to provide a consumer with certain disclosures along with an unsigned copy of the proposed written contract between the debt settlement provider and the consumer and prohibits certain unfair, abusive, or deceptive practices in connection with payment processor activities. Existing law authorizes a consumer to terminate a contract for debt settlement services at any time without a fee or penalty of any sort by notifying the debt settlement provider, at which time the debt settlement provider is required to, among other things, provide, within 3 business days, a detailed accounting of any amounts received or expected to be received by the debt settlement provider from the consumer’s settlement account after the debt settlement provider received effective notice of request for cancellation. Existing law authorizes a consumer to bring a civil action for violation of these provisions. This bill would expand the protections for consumers described above to include commercial financing recipients, debtors, as defined, and make other, nonsubstantive and related changes. Digest Key Vote: MAJORITY Appropriation: NO Fiscal Committee: NO Local Program: NO Bill Text The people of the State of California do enact as follows: SECTION 1. Section 1788.301 of the Civil Code is amended to read: 1788.301. For purposes of this title: (a) “Commercial financing” loan” means an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient a loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes. For purposes of determining whether a loan is a commercial loan, the lender may rely on any written statement of intended purposes signed by the borrower. The statement may be a separate statement signed by the borrower or may be contained in a loan application or other document signed by the borrower. The lender shall not be required to ascertain that the proceeds of the loan are used in accordance with the statement of intended purposes. (b) “Commercial financing recipient” debtor” means a person who receives commercial financing in satisfies both of the following conditions: (1) The person owes commercial debt in an amount equal to or less than five hundred thousand dollars ($500,000) and who is responsible for repaying that debt. (2) The person is not a business entity organized for profit with annual gross receipts of more than the annual gross receipt level established for a “small business” as biennially adjusted by the Department of General Services in accordance with Section 14837 of the Government Code. (c) “Debt settlement provider” means a person who, for compensation and on behalf of a consumer or commercial financing recipient, debtor, provides debt settlement services. (d) “Debt settlement services” means any of the following: (1) Providing advice, or offering to act or acting as an intermediary, including, but not limited to, offering debt negotiation, debt reduction, or debt relief services between a consumer and one or more of the consumer’s creditors or between a commercial financing recipient debtor and one or more of the commercial financing recipient’s debtor’s creditors, if the primary purpose of that advice or action is to obtain a settlement for less than the full amount of the debt. (2) Advising, encouraging, or counseling a consumer or commercial financing recipient debtor to accumulate funds in an account for future payment of a reduced amount of debt to one or more of the consumer’s or commercial financing recipient’s debtor’s creditors. (e) “Settlement account” means a depository account established and used for the purpose of holding funds of a consumer or commercial financing recipient debtor to be distributed to a creditor in the event of a settlement of a consumer’s or commercial financing recipient’s debtor’s debt with the creditor. (f) “Consumer” means a person who is allegedly legally responsible for a consumer debt. (g) “Person” means a natural person or entity, whether a corporation, partnership, association, trust, limited liability company, cooperative, or other organization. (h) “Creditor” means the person who originated the debt or is assigned, or has purchased for collection, a debt for which a consumer or commercial financing recipient debtor is allegedly legally responsible. (i) “Commercial debt” means money, whether in principal, interest, fees, or other charges, that is due or owing or alleged to be due relating to one or more commercial loans. (i) “Debt” (j) “Consumer debt” means money, whether in principal, interest, fees, or other charges, which is due or owing or alleged to be due or owing from a consumer or commercial financing recipient to another person. natural person to another person and incurred primarily for personal, family, or household purposes. (j) (k) “Payment processor” means a person who provides payment processing services. (k) (l) “Payment processing services” means accepting, maintaining, holding, or distributing funds, or facilitating the acceptance, maintenance, holding, or distribution of funds, on behalf of a consumer or commercial financing recipient debtor for the purpose of facilitating debt settlement services. SEC. 2. Section 1788.302 of the Civil Code is amended to read: 1788.302. (a) A debt settlement provider shall not engage in false, deceptive, or misleading acts or practices when providing debt settlement services. Without limiting the general application of the foregoing, an act or practice is false, deceptive, or misleading, in connection with providing debt settlement services, if the act or practice consists of any of the following: (1) Making or permitting another entity to publicly make on behalf of the debt settlement provider, a statement or representation that is false, deceptive, or misleading. (2) Posting directly, or indirectly causing to be posted, an online review or ranking on an internet website if the debt settlement provider, or its agent, provided anything of value in exchange for favorable treatment in that review or ranking. (3) Omitting any material information. (b) A debt settlement provider shall provide to the consumer or commercial financing recipient debtor the following disclosures along with an unsigned copy of the written contract proposed to be entered into between the debt settlement provider and the consumer or commercial financing recipient no less than three calendar days prior to the execution of that contract by the consumer or commercial financing recipient. debtor. A fully executed copy of the contract shall be delivered to the consumer or commercial financing recipient debtor by the debt settlement provider immediately after the debt settlement provider receives the contract. (1) The contract shall be preceded by a disclosure that contains all of the following information in conspicuous boldface type that is larger than the typeface provided in the contract typeface: (A) There is no guarantee that any particular debt or all of the consumer’s or commercial financing recipient’s debtor’s enrolled debts will be reduced, eliminated, or otherwise settled. (B) The deposits made pursuant to the contract will not be distributed to the creditor until a settlement is obtained. This may take months to achieve. (C) If the consumer or commercial financing recipient debtor stops paying any creditor, any of the following may occur: (i) The creditors may still try to collect. (ii) The creditors may sue. (iii) If a creditor obtains a judgment against the consumer or commercial financing recipient, debtor, the creditor may garnish the consumer’s wages or levy the consumer’s or commercial financing recipient’s debtor’s bank account or accounts, or both garnish the consumer’s wages and levy the consumer’s bank account or accounts. (iv) The consumer’s or commercial financing recipient’s debtor’s credit score or credit rating may be negatively impacted. (D) Failing to pay debts on time may adversely affect the consumer’s or commercial financing recipient’s debtor’s credit rating or credit scores. (E) Specific results cannot be predicted or guaranteed, and the debt settlement provider cannot require a creditor to negotiate or settle a debt. (F) A consumer or commercial financing recipient debtor may cancel the debt settlement contract at any time without any penalty. (G) Debt settlement services may not be suitable for all individuals. (H) Bankruptcy may provide an alternative to debt settlement. (I) Canceled debt may be counted as income under federal tax law, and the consumer or commercial financing recipient debtor may have to pay income taxes on the amount of forgiven or reduced debt. (J) Many sources of income may be protected from debt collection. Common sources of protected income include disability insurance benefits, life insurance benefits, military benefits, pension plans, retirement benefits, public assistance, social security benefits, supplemental security income (SSI), unemployment benefits, veterans benefits, workers compensation, and student aid. See form EJ-155 from the Judicial Council for a complete list. (K) The number of months estimated to enter into settlement agreements that completely resolve all enrolled debts. (L) All conditions that the consumer or commercial financing recipient debtor must satisfy before the debt settlement provider will make a settlement offer to a creditor. (M) Whether the debt settlement provider pays or receives referral fees. (2) Each contract between a consumer or commercial financing recipient debtor and debt settlement provider: (A) Shall list each debt to be serviced, including, for each debt, the name of the creditor and the total amount of the debt. The total amount of the debt may be based on either a billing statement for the debt or information in the consumer’s consumer report, as that term is defined under the federal Fair Credit Reporting Act (15 U.S.C. Sec. 1681 et seq.). The billing statement or consumer report must have been issued within 30 calendar days of the date of the contract. (B) Shall provide the estimated period of time it will take the consumer or commercial financing recipient debtor to accumulate in a settlement account the amount of money estimated to be required to settle all debts. (C) Shall provide the minimum amount of time necessary to achieve the represented results. (D) Shall provide, in terms easily understood by the least sophisticated consumer or commercial financing recipient, debtor, the method that the debt settlement provider will use to calculate the charges and fees for debt settlement services. (E) Shall provide the name and mailing address of the debt settlement provider and of the consumer or commercial financing recipient. debtor. (F) Shall provide a telephone number at which the consumer or commercial financing recipient debtor may speak, during normal business hours, with a live representative of the debt settlement provider during normal business hours who is able to access information about the consumer’s or commercial financing recipient’s debtor’s account. (G) Shall be provided to the consumer or commercial financing recipient debtor in English and in the language in which it was negotiated or in which the debt settlement services were offered, if that language is one of the languages set forth in Section 1632. (H) Shall not require a compulsory agreement with any other party. A debt settlement provider may require that the consumer or commercial financing recipient debtor obtain a dedicated settlement account and provide a list of preferred vendors, however a payment processor who receives compensation from the consumer or commercial financing recipient debtor for payment processing services must supply its own contract to the consumer or commercial financing recipient debtor for engagement. (I) Shall not be entered into by a consumer or commercial financing recipient debtor who is not already allegedly legally responsible for all the debt that will be enrolled in the debt settlement services. In the event multiple consumers or commercial financing recipients debtors engage in a single contract for debt settlement services, if any consumer or commercial financing recipient debtor is not proficient in English and speaks a language set forth in Section 1632, a translated copy of the disclosures and contract shall be provided to the consumer or commercial financing recipient debtor in that language and in a manner that complies with this subdivision. (3) (A) A debt settlement provider shall provide the disclosures and unsigned copy of the written contract required by this subdivision to the consumer no less than three calendar days before the execution of the contract by the consumer. (3) (B) A debt settlement provider shall not communicate with any of a consumer’s or commercial financing recipient’s creditors until five calendar days after full execution of a contract for debt settlement services. (C) This paragraph does not apply to commercial debt. (c) A debt settlement provider and a payment processor shall not engage in unfair, abusive, or deceptive acts or practices when providing debt settlement services or payment processing services. Without limiting the general application of the foregoing, in connection with providing debt settlement services and payment processing services, an act or practice is unfair, abusive, or deceptive if the act or practice consists of any of the following: (1) For a debt settlement provider and payment processor, offering to lend money or extend credit to the consumer or commercial financing recipient, debtor, or purchase an enrolled debt. (2) For a debt settlement provider and in relation to a consumer debt, requesting or receiving payment of any fee or consideration for debt settlement services, unless and until all of the following occur: (A) The debt settlement provider has renegotiated, settled, reduced, or otherwise altered the terms of at least one debt pursuant to a se [Text truncated for display. Full text available on Congress.gov.]