California’s New Debt Collection Laws What Individuals and Businesses Must Know

California is radically reshaping how debt can be collected across the state. With the introduction of Senate Bill 1286 (SB 1286) and overlapping regulations like the Debt Collection Licensing Act (DCLA), the state now offers sweeping protections for consumers and small businesses alike. These updates, effective beginning January 1 and July 1, 2025, represent a turning point in the financial rights of Californians.

I. SB 1286: Expanding the Rosenthal Fair Debt Collection Practices Act

Effective July 1, 2025, SB 1286 extends California’s Rosenthal Act protections beyond consumer debt to cover certain commercial debts:

Who Is Protected:

• Small businesses with debts up to $500,000.
• Personal guarantors of business loans.

Major Protections:

• No harassment: No excessive calls or contact before 8 a.m. or after 9 p.m.
• No false legal threats: Collectors can’t threaten lawsuits unless litigation is imminent.
• No third-party disclosure: Debt information cannot be shared with employers or family members.
• No deceptive forms: Simulating court documents is now a misdemeanor punishable by up to 6 months jail and $2,500 per violation.
• Venue restrictions: Lawsuits must be filed where the debtor lives, where the debt originated, or where the business is based.

Key Application Note: These rules apply to debts originated, renewed, sold, or assigned after July 1, 2025.

II. Medical Debt Credit Reporting Ban

Effective January 1, 2025, California will prohibit credit reporting agencies from including any medical debt, regardless of amount.

Exemptions:

• Medical debts paid with general-purpose credit cards are still reportable.

Enforcement:

• Consumers can file complaints with the California DFPI or sue for violations.

III. AB 850: Institutional Debt Transparency for Students

Targeting debts like tuition or library fees, this bill:

• Bans enrollment holds over unpaid institutional debt unless the student has had one grace exemption.
• Mandates transparency: Public colleges must report institutional debt data biannually starting in 2027.
• Protects active repayment plans: Students in repayment cannot be barred from registering.

IV. AB 1166: Debt Settlement Reform

Expands the Fair Debt Settlement Practices Act to commercial accounts:

• Requires disclosures like:
  • “Bankruptcy may be a better option.”
  • “No guarantee debts will be reduced.”
  • “Forgiven debts may be taxed.”
• Bans upfront fees before results are delivered.

Related article: Does Debt Go Away After 7 Years in California?

V. Penalties and Enforcement Mechanisms

Under both SB 1286 and DCLA:

• Civil penalties: Up to $1,000 per violation plus actual damages and attorney fees.
• Criminal penalties: Misdemeanor charges for false legal threats or using fake legal forms.
• DFPI powers: Can revoke licenses, impose penalties, or issue desist orders.

VI. Interplay with Federal Law

• California vs. FDCPA: The Rosenthal Act is stricter. Where it provides more protection than the FDCPA, state law controls.
• SB 1286 aligns commercial debt protections more closely with federal consumer protections.

VII. Compliance Guide for Collectors

For All Entities Collecting Debt in CA:

• Get licensed: Under DCLA, debt collectors must register with the NMLS, even in-house teams.
• Train staff on call limitations, documentation, and legal boundaries.
• Audit scripts/forms for misleading language.
• Track dates to determine if a debt is covered under SB 1286.
• Segregate medical accounts from other portfolios to avoid accidental violations.
• Submit annual reports starting June 30, 2026, on California debtor proceeds.

Exempt Entities: FDIC banks, credit unions, and some finance lenders are exempt from licensing but must still follow conduct rules.

VIII. Key Dates

Law/Policy	Effective Date
Medical Debt Ban (SB 1061)	Jan 1, 2025
SB 1286 (Commercial Debt)	July 1, 2025
Annual DFPI Reporting Deadline	June 30, 2026
AB 850 (Student Debt) Reporting	Jan 1, 2027

IX. Real Cases and Enforcement

• DFPI fined five collectors $375,000 for unlawful practices like fake threats and unlicensed activity.
• Default judgment abuse: Collectors misled consumers using intimidating letters mimicking lawsuits.
• Venue violations: Collectors were sued for filing in the wrong county.

FAQ

When does SB 1286 take effect?

July 1, 2025. This is the official effective date for its consumer and commercial protections.

Who must obtain a DCLA license?

Any person or company collecting consumer debt in California, including third-party and in-house collectors, unless exempt.

Are small businesses really protected under the Rosenthal Act now?

Yes. Businesses with debts up to $500,000 and their personal guarantors now qualify for many of the same protections as consumers.

Can collectors still report medical debt to credit bureaus?
No. Starting Jan 1, 2025, all medical debt (except general-purpose credit card charges) is banned from credit reports.

What if a debt originated before 2025?

If it was assigned, renewed, or sold after July 1, 2025, the new rules apply.

What penalties apply for violations?

Violators may face $1,000 per infraction, actual damages, attorney fees, and even jail time for criminal actions.

Conclusion: A New Era of Debt Protection in California

From medical bills to commercial lending, California now offers one of the strongest debt collection frameworks in the U.S. These laws don’t just protect consumers—they shield small business owners, students, and patients from unfair practices while creating clear rules for creditors and collectors.

If you collect or owe debt in California, prepare for July 1, 2025—where enforcement, lawsuits, and even call scripts will face a new legal standard.

Stay compliant, stay protected.