California Moves to Regulate Booming Debt Settlement Industry

Before the pandemic, Graciela Gomez relied on two jobs to keep up with her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.

“I didn’t know who to talk to, who to contact. I was embarrassed,” Gomez said.

An ad for a debt settlement company appeared on her social media feed promising to lower her debt. After following up, she says what she got was a lawsuit from one of her credit card companies in March. She’s still fighting today.

“I didn’t know who to talk to, who to contact. I was embarrassed.”

As California emerges from the pandemic, some residents face crippling personal debt, even as many of the state’s richest residents have seen their wealth grow. Among the economic winners is the booming debt settlement industry, composed largely of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on the customer’s behalf. But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.

Now California lawmakers are considering legislation that would more tightly regulate the industry after largely overlooking personal debt from credit cards and loans in pandemic-era legislation focused on relieving rental and utilities debt. The bill is reviving a perennial debate in the Capitol over whether alternative financial services — like payday loans, debt settlement, and credit repair — are financial predators or a needed lifeline for Californians with little or poor credit.

Assemblymember Buffy Wicks, a Democrat from Oakland who authored the bill, contends that existing federal regulations don’t go far enough to protect Californians.

“Let’s make sure that if they are working with these companies, that there’s transparency and empowerment for the consumer in that process,” Wicks said.

How debt settlement works

After Gomez’s first phone call with ClearOne Advantage, the debt settlement company, she said she was under the impression that the company would pay off all her debts, and that she would only need to make one monthly payment to the company until she paid off the balance.

“She made it sound easy, like ‘We’re here to help….Your life is going to change. It’s going to be so much easier.’ And I believed it,” Gomez said.

ClearOne Advantage declined to comment on Gomez’s experience. The company provided what it said was testimony from a satisfied customer, but refused to provide contact information so CalMatters could interview the customer.

Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.


Customers who enroll in a debt settlement plan make a monthly payment to a debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the customer has defaulted on their debts — which can sometimes take up to six months — before they begin to negotiate with creditors.

The defaults must occur before the negotiation process can begin, but the debt settlement companies avoid explicitly saying this, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.

In a best case scenario, willing creditors agree to settle the debt for less than the amount owed. After the customer agrees to the new terms, the debt settlement fund will be used to pay the debt.

The outcome is worse if a creditor refuses to work with the debt settlement company. As part of the program, customers sign a cease-and-desist letter that prohibits creditors from contacting them directly. In an effort to collect the debt, creditors will sue customers, often resulting in a judge ordering that the money be taken out of the customer’s bank account or paychecks.

“They come to me when they get sued and they’re like, ‘Why am I being sued? I enrolled in a debt settlement plan. I don’t get it,’” Nguyen Orth said.

She added that most customers don’t realize they can negotiate with creditors themselves. For free.

“I think (debt settlement) is one of the options that needs to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, an debt settlement industry advocacy organization. “We educate people the right way, and make sure that we self-police the industry to make sure that consumers are getting the best possible outcomes.”

“Why would any state take away debt settlement as an option to these families during this pandemic?”

As part of the enrollment process, Gomez provided her income, expenses, and debts to establish a monthly budget. But she said she was left with the impression she could afford to pay a monthly $250 deposit into her settlement fund when she really couldn’t.

The ClearOne Advantage representative also told her that they could not help her if she was not enrolling at least $10,000 in debt, she said — prompting her to enroll a credit card on which she had been making regular payments so she could participate in the program.

The agreement Gomez signed, which CalMatters reviewed, has no mention of minimum requirements to enroll in the program, but does charge a fee assessed at 25% of the total debt. That means the company ultimately plans to charge her just over $2,500. As of June 2021, Gomez deposited $2,259 into her settlement fund, of which $1,053 has been debited as service and transaction fees.

It wasn’t until Gomez was sued by Bank of America, she said, that she learned she had defaulted on all her credit cards and she was now facing a court judgement.

“If I had known since day one that I could have been sued, I think right there, I would have stopped and I would have tried to get more research to try to understand what was the point of paying (ClearOne Advantage),” Gomez said.

What the bill would do

Assembly Bill 1405 wouldn’t change how debt settlement companies work, but it would add more regulation. Existing federal regulation is limited to companies servicing customers across state lines.

The state bill would mimic some of those federal rules, applying them to California-based companies, as well as adding new rules like giving customers a three-day “cooling off period” before the contract takes effect.

The bill is advancing despite almost unanimous opposition from Republicans. Several lobbies have removed their opposition after successfully pushing for amendments, including one that would remove regulations around referral fees, a major source of income for the industry.

But before the most recent amendments, the debt settlement industry had coalesced in opposition to the bill. The Consumer Debt Relief Initiative, composed of members of the debt settlement industry, maintained that new regulations would harm the very consumers that the bill is trying to protect by driving debt settlement companies out of California, leaving consumers with few options.

“Why would any state take away debt settlement as an option to these families during this pandemic?” said Willie Brown, former Assembly Speaker and mayor of San Francisco, in a Consumer Debt Relief Initiative video. “It’s a vital service to those who need it most.”

The alternative for many families, Brown and the industry argue, is bankruptcy or worse.

“You’re left with nothing but bad actors — it creates almost a black market,” said Gordon, the group’s president.

Assemblymember Wicks disagreed.  “For the bad actors, if they feel like they can’t operate in California, then they can go somewhere else,” she said. “And for the good actors, they can stay here and they can help our working families that do need help.”

Gordon said he believes the bill is more about benefiting banks and credit card companies who don’t like having to negotiate customer debts down.

OneMain Financial, the only creditor backing the bill, declined to comment, but stated in a letter of support for the bill that their main goal is to work directly with their customers who default on their debts.

Primed for debt settlement

Despite loan forbearance from the federal CARES Act and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely overlooked by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.

“That is a huge bubble of people who are primed for debt settlement,” Nguyen Orth said.

The debt settlement industry expects to do very well. In a February meeting of the Consumer Debt Relief Initiative, an Accenture market analysis said that the industry projects a 75% increase in the number of accounts enrolled in debt settlement services in 2021.

The new California Consumer Financial Protection Law, which took effect Jan. 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. The agency says it won’t start tracking debt settlement companies until 2023.

Does the bill go far enough?

According to Nguyen Orth, everything ClearOne Advantage did in this case is legal, so it’s unlikely that AB 1405 would have changed much for Gomez. But the bill would address some of the more egregious practices that Nguyen Orth has seen, she said, like promising unrealistic outcomes without advising customers of the possible risks or offering predatory loans that can lead to further debt.

Gomez ended her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and outstanding balance. Her advice for others? Avoid debt settlement companies at all costs.

“It’s an absolute scam. They prey on people like me,” Gomez said. “Call the credit cards or collection agencies yourself….It’s easier, and the money will go directly to who you owe.”


Erika Paz is a reporter with CalMatters. This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.




  1. The fact that Willie Brown is employed as a lobbyist spokesperson by debt settlement companies who prey disproportionately on poor and indebted people of color should immediately alert people to the fact that those companies are predatory. Brown has no significant personal history or experience in civil rights or in workers, women’s or progressive organizations in the Black community or in any community. His affiliations and allegiances both in his political career and in his long years as a lobbyist and influence peddler, have always been mainly to White and wealthy donors and insiders. He is the very definition of a shyster and a shill.

    Brown was among the very first Black Californians to leverage their identities, particularly among White liberal supporters of the civil rights and voting rights movement, to launch political careers. He was part of the Phil Burton political machine initially developed in the early 1960s from a group of Young Democrats at San Francisco State University that would eventually produce a network of powerful politicians like Brown, former San Francisco mayor George Moscone, former U.S. Senator Barbara Boxer, U.S. House Speaker Nancy Pelosi, California Governor Gavin Newsom, as well as Vice President Kamala Harris. Brown was also known for his use of patronage and opportunist backroom dealings both among Democrats and Republicans in Sacramento.

    Brown has been a consistent ally, attorney and, more recently, a lobbyist for wealthy donors and interests whose largesse funded his campaigns and political career and which have had business with the state and the city of San Francisco. After the November 2020 elections, Brown announced the establishment of a new national lobbying firm with Ed Rollins, a former Reagan aid, presumably to cash in on his ties to the new vice president, the House Speaker and other prominent Democrats in Washington (; Willie-Brown-Inc-How-S-F-s-mayor-built-a-city-2926278.php; sfbgarchive/2014/09/29/now-willie-brown-lobbyist-will-sf-chronicle-finally-cut-him-loose/;

    Beware of this fraudster and any projects in which he is involved.

  2. The real criticism of Brown is more general and about other things, while also acknowledging he is someone who exemplified Democrat ownership of the state legislature almost completely and continuously since 1959, as well as being a master power politician running his part of the state legislature. Brown also came with nothing from Mineola, Texas and real Jim Crow to a San Francisco and California that gave him an opportunity he took.

  3. “She added that most customers don’t realize they can negotiate with creditors themselves. For free.” — Desiree Nguyen Orth

    Why don’t they know this? Perhaps it’s because our school system is more concerned with disseminating Progressive nonsense than providing students with the information they’ll need to negotiate the world that awaits them, a world that is, and forever will be, predatory.

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