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Few things sound as unpleasant or intimidating as talking to the companies that you owe money to. But communicating with your bank, credit card company, utilities, or other companies that you’re trying to pay back can actually make it easier to repay all of your debt. Faced with no communications, companies turn to penalties, letters, phone calls, and later even harsher collection actions when your payments are overdue.
But many companies are willing to work with customers who are struggling to pay back what they owe. Learning how to deal with creditors, depending on their actions, can help you avoid deeper money problems. And when they’re not willing to work with you, you still have options such as debt management plans, or filing a consumer proposal or bankruptcy.
What Are Creditors?
A creditor is any person, company, or entity that extends credit to you. That can include loans, revolving credit, or money owed for services already rendered. It’s generally agreed that there are three types of credit commonly available.
Revolving credit is where you only need to make minimum payments each month, and the remaining balance carries over (or revolves) into the next. This includes credit cards and lines of credit.
Installment accounts are accounts where you agree to repay a fixed sum every month based on how much you borrowed and the period of the loan. A good example would be a mortgage or a student loan.
Open accounts are accounts where you are extended a service each month, and you have to pay the full balance afterward. This includes utilities, phone, internet, etc.
People usually have a mix of these types of credit. If you’re struggling to pay back any of these obligations, talk to a Licensed Insolvency Trustee, formerly known as bankruptcy trustees, about repayment options, contacting your creditors, and actions you can take to protect yourself from legal actions to collect, such as liens or wage garnishments.
Creditors include credit card companies, banks, credit unions, utility providers, debt collection agencies, individuals, as well as car dealerships for auto loans, the government if you owe taxes, or service providers with whom you’ve agreed to a payment plan, like the dentist.
When Should You Talk to Your Creditors?
Often, people are worried about what will happen if they approach their creditors. Will their utilities be cut off if they admit they’re struggling to pay the bill? Will they lose their credit card if they call and explain their circumstances?
Ignoring the problem is usually what makes things worse. Dealing with creditors can work out in your interest, as they might be willing to:
- Offer relief on interest rates
- Work on a payment plan that’s within your means
- Help you avoid bankruptcy
They may be willing to cooperate because they know that they can recoup more of their money by working with you than if you were to file for bankruptcy or a consumer proposal in Ontario. Cooperating can help you deal with creditors without taking the hit to your credit score that insolvency would require.
How to Talk to Creditors
If you are going to reach out to your creditors, it’s important that you are honest and factual in what you report. Provide an explanation of your circumstances in writing so that they understand the full details of your situation. A written explanation also allows an employee to pass those details in full up to a manager who may have more authority over your account.
When Your Creditors Contact You
You won’t hear much when you make your payments on time, but if you fall behind, they will begin to take progressively stronger actions.
If you miss a payment after the first 30-day period, you should be notified that your payment was late. You may be charged a late penalty, but if it’s your first time, you may not be.
If you miss another payment after 60 days, it may be reported to a credit bureau, affecting your credit score. After 90 days, you may be charged penalty interest. Once you have not made a payment after 120 days, it goes to collections, and they can start taking legal actions to recover their funds.
This is when you may need help with creditors, as they can start calling you at home or your workplace and sending you collection letters. There are also legal actions creditors can take, such as garnishing your wages or your account. They may also pass off your account to a debt collector.
What If You’re Contacted by Debt Collectors?
Your creditor may use a debt collection agency if you haven’t made a payment in over 120 days. There are two types of debt collectors:
- Those who are hired by your creditor and collect a percentage of what they recover, usually around 25% to 50% of what they collect.
- Those who buy debt for pennies on the dollar and get to keep everything they collect.
In the case of agencies that buy debt, they become your creditor, and they have a legitimate claim, even if they’re not the entity you borrowed money from.
There are limits to how and when a debt collector can contact you. In Ontario, they can only call you between 7 a.m. and 9 p.m. on weekdays, and 1 p.m. and 5 p.m. on Saturday and Sunday, to a maximum of 3 times in 7 days. However, these calls only count if they speak to you or leave a voicemail. They can keep calling if you don’t answer. They are also not allowed to make threats and must be civil in their language. You can also write them a letter to demand that you only receive communications in writing.
If you can afford to, you can negotiate a payment plan with a debt collector. However, if debt collectors are contacting you, it may be time to talk to a Licensed Insolvency Trustee about your alternatives.
Avoid Committing to a Payment Plan You Can’t Afford
Pressure from creditors can be stressful. They are motivated to get you to agree to pay them as much as possible. Debt collectors may even pressure you into doing something like using home equity for debt consolidation.
A home equity line of credit (HELOC) has a much lower interest rate than credit cards typically do, and it can seem like a sensible option. But what you’re doing is trading unsecured debt that can be managed in a consumer proposal for secured debt. If you take out too much on a HELOC and fail to keep up with payments, the mortgage lender can wind up taking your home when it may have been protected in bankruptcy.
Talk to a debt expert before agreeing to drastic measures. They can offer help with your creditors and make sure you do what’s best for your own financial health. Never agree to conditions you know you can’t afford.
How to Protect Yourself from Collection Actions
When you reach a point that you’re facing calls from debt collectors, wage garnishment, or having your bank account frozen, it may be time to legally protect yourself from creditors. There are two ways you can put a stop to legal collection actions: bankruptcy or a consumer proposal. The moment you file either of these, all collection actions must stop. It’s an emergency brake that gives you a chance to deal with creditors when things have gotten out of control.
They are not without consequences. You may lose assets in bankruptcy, although you can protect your assets with a consumer proposal. Your credit score will be negatively affected, although if you are getting calls from debt collectors or your wages are being garnished, your score is likely already low due to missed payments. In a consumer proposal, you will still have to make monthly payments for a period of up to five years. However, your income and expenses are taken into account, and a consumer proposal should help you deal with creditors on more favourable terms.
Once collection actions are part of the equation, it may no longer make sense to try to pay it back on your own, and it may be too late to deal with creditors without help.
Talk to Your Creditors Early in the Process
Before you file for insolvency, talking to your creditors can help you find an alternative. They may be open to providing reduced interest rates or a negotiated payment plan. That can help you avoid having to give up assets for your bankruptcy or take the hit to your credit score.
If it’s too late to negotiate, get help dealing with creditors before you lose control of your finances. The legal actions creditors can take to collect on debt can make your financial situation even more precarious than it already is.