Governor Gavin Newsom Signs Strong Consumer Protections Against Predatory Debt Settlement Companies

SACRAMENTO, Calif. — Governor Gavin Newsom signed Senate Bill 1142 into law on Monday, enacting comprehensive regulatory oversight and statutory fee limits for commercial debt settlement, credit repair, and debt relief companies operating in California.

The legislation, authored by State Senator Monique Limón and sponsored by the California Department of Financial Protection and Innovation (DFPI), establishes an absolute statutory ban on upfront fees, limits total contingency fees to 15 percent of documented debt savings, and requires debt settlement agencies to be licensed and bonded by the state.

Protecting Vulnerable Consumers from Deceptive Financial Traps State regulatory investigations revealed that predatory debt relief companies frequently charged consumers thousands of dollars in advance fees while instructing them to halt communication with legitimate creditors, resulting in damaged credit scores, aggressive creditor lawsuits, and wage garnishments without resolving underlying debts.

"When Californians face unexpected financial hardship, medical bills, or job loss, they deserve honest assistance, not deceptive predatory companies charging thousands of dollars in upfront junk fees while pushing them deeper into debt," Governor Newsom said during a bill signing at the State Capitol. "SB 1142 puts an end to deceptive debt settlement schemes, establishes strict fee transparency, and empowers our state financial regulators to shut down bad actors who exploit vulnerable families."

Key Consumer Safeguards Under SB 1142 Under the enacted statute:

• Zero Upfront Fees: Debt settlement companies cannot charge or collect any fee until a debt has been successfully renegotiated and the consumer has executed a binding settlement agreement.
• 15 Percent Fee Ceiling: Total fees cannot exceed 15 percent of the actual dollar amount saved by the consumer through renegotiated principal.
• Mandatory Licensing and Trust Account Audits: Debt relief companies must obtain a DFPI commercial license and maintain segregated consumer escrow accounts subject to annual state audits.

Consumer advocacy coalitions, legal aid societies, and credit union federations praised the legislation, pointing out that strict fee caps protect low-income consumers from financial exploitation.