California Expands Debt Collection Protections to Commercial Debt with SB 1286

 California has long been a leader in consumer protection, and the passage of Senate Bill 1286 (Stats. 2024, ch. 522) continues that tradition. This new law, effective January 1, 2025, expands the coverage of the Rosenthal Fair Debt Collection Practices Act (RFDCPA) to include certain types of commercial debt. Historically, the RFDCPA only applied to consumer debt, providing safeguards against abusive, unfair, or deceptive collection practices. SB 1286 marks a significant shift in California’s approach to debt collection by extending these protections to small business owners and entrepreneurs.

What Does SB 1286 Do?

The Rosenthal Act, codified in Civil Code §§ 1788–1788.33, governs debt collection practices and establishes penalties for violations. SB 1286 amends the act to cover "specified commercial debt," which includes obligations incurred by small businesses for goods, services, or credit primarily used for business purposes.

This change means that debt collectors must now adhere to the same stringent rules when pursuing commercial debt as they do for consumer debt. Prohibited practices include harassment, threats, misrepresentation of the debt, and attempts to collect debts that are not legally enforceable. Small business owners, particularly those struggling in a volatile economy, now have recourse against unscrupulous collectors.

Who Does the Law Apply To?

SB 1286 primarily benefits small business owners who may lack the resources to defend themselves against aggressive or predatory debt collection tactics. It applies to debt collectors, collection agencies, and even original creditors engaging in collection efforts for commercial debts falling under the expanded definition.

The bill does not extend to large businesses or commercial debt involving entities with significant financial resources. Instead, the focus remains on small enterprises—those that often find themselves most vulnerable to economic pressures and ineq
uitable collection practices.

Why Was SB 1286 Necessary?

Governor Gavin Newsom, in signing the bill, emphasized the importance of protecting small businesses, which are the backbone of California’s economy. The COVID-19 pandemic and subsequent economic uncertainties exposed many small businesses to financial hardships, leaving them at the mercy of aggressive debt collection practices. Advocates for SB 1286 argued that extending RFDCPA protections was a matter of economic equity, ensuring that small business owners receive the same rights as individual consumers.

The bill’s proponents also pointed out that abusive debt collection practices can lead to unnecessary bankruptcies, closures, and financial ruin for entrepreneurs. Providing a fair legal framework was deemed essential to fostering a business environment where small enterprises can thrive.

 

Opposition to SB 1286

Despite its passage, SB 1286 faced significant opposition from creditor groups and business associations. Critics argued that the expanded protections could increase the cost of credit for small businesses, as lenders might pass on the cost of compliance to borrowers. They also expressed concern that the bill could lead to frivolous lawsuits, further burdening an already overextended judicial system.

However, supporters of the bill countered that fair practices benefit both lenders and borrowers by promoting transparency and accountability in the marketplace. They contended that the economic impact on creditors would be minimal compared to the societal benefits of protecting vulnerable businesses.

While SB 1286 primarily focuses on extending protections to specified commercial debt, its roots in the Rosenthal Fair Debt Collection Practices Act (RFDCPA) mean that the law continues to apply robust safeguards to consumer debt as well. For consumers, the RFDCPA prohibits practices like harassment, false statements, and attempts to collect debts not legally owed, providing a critical layer of protection against abusive debt collection practices. By expanding the scope of the RFDCPA to include small business debt, SB 1286 underscores the broader principle that fairness and transparency should govern all debt collection efforts, whether they target individual consumers or small business owners. This alignment may also indirectly benefit consumers by establishing more consistent standards and practices within the debt collection industry as a whole.

SB 1286 underscores the necessity for businesses and consumers to retain an attorney experienced in debt collection, and it represents a landmark step in California’s ongoing efforts to ensure fair treatment in financial transactions. By expanding the RFDCPA’s protections to specified commercial debt, the state aims to level the playing field for small business owners while addressing systemic inequities in debt collection practices. While the law’s long-term impact remains to be seen, it underscores California’s commitment to balancing economic growth with consumer and small business protections.

 

By: Desiree T. Washington, Esq. at Washington Law Firm