Creditors want you to pay them back, and they can use multiple strategies to pressure you to do so. In fact, some of these strategies are built into the terms of your loans.
Your loans come with interest rates that make your debts grow the longer that you take to pay them down. Your bill payments have strict deadlines — and if you miss those, you’ll get late fees tacked onto your next payments. These are small incentives that push you to prioritize repayment as soon as possible.
When the incentives aren’t enough, creditors will escalate their collection strategies in an attempt to get what they’re owed. This includes taking legal action against you.
Learn what legal actions your creditors can pursue and how David Sklar & Associates can help you avoid them:
What Creditors Can Do When You Don’t Pay
Creditors can take several methods to penalize you for not making your repayments in full and on time. Some of these methods occur immediately after you miss a single payment, while others occur after longer periods of non-payment. Here are some of the actions that creditors can take against non-paying customers:
- Charging late fees
- Raising interest rates
- Marking your credit report
- Using collection agencies
- Pursuing co-signers for payment
- Cutting off services
- Seizing assets (for example, foreclosing your home after missing mortgage payments)
- Withholding funds
- Using the Right of Offset
What’s The Right of Offset?
The Right of Offset is a strategy that banks can use when you’re in debt to them. They can take funds from your bank account without needing any court approval in order to recoup what you owe them.
If creditors don’t think these strategies are enough to collect what they are owed, or they’ve tried the strategies already and they haven’t yielded successful results, they could make the decision to take legal action against you.
If you’re worried about creditors taking legal action against you, you have to consider three things:
How Much You Owe
It’s not common for creditors to take legal action against their customers because it is a complicated and costly endeavor. The reality is, most creditors are not going to take you to Court unless they believe it will be worth their time and effort. Instead, they will focus on customers that owe a significant amount of money — this will be much more than a few hundred dollars.
How Long You’ve Owed
Another important factor is how long you’ve owed these debts. In Ontario, there is a statute of limitations that stops unsecured creditors and debt collectors from starting legal action against you after two years of non-payment.
Who You Owe
Finally, you need to consider who you owe. A small creditor is less likely to go forward with legal action, but a large bank or government-backed creditor is. For example, the Canada Revenue Agency has an incredible amount of collection power and can pursue multiple types of legal actions against citizens when they see fit.
What Are Some Legal Actions That Creditors Can Take?
A wage garnishment order requires your employer to withhold a portion of your paycheque and send it to the creditor in an effort to repay them.
Freezing Bank Accounts
With this court order, the creditor can contact your bank and tell them to freeze your account and then send them the funds inside.
Unsecured creditors can use a Writ of Seizure to take possession of an asset as a way to repay them. This includes accounts receivables, where your customer must pay the creditor instead of paying you —that is a 100% loss for you.
How to Avoid Legal Actions
Making your payments in full and on time is the best way to avoid situations where creditors take legal action against you in order to get their payments. Unfortunately, this goal is not always easy to achieve.
Income uncertainty, large debt loads, and other financial issues can make it difficult to keep up with every upcoming payment that you have to make. If you find yourself in this position, here are some things that you can do before your creditors escalate their collection actions:
Review Your Finances
The first thing that you should do is look over your finances to see how you can decrease your expenses and make larger payments. If you need help with this, read our blog about owing money to see how you can manage your debt payments better.
Pay the Minimum
Credit card companies allow you to make a minimum payment when your bill is due. The minimum payment is based on a percentage of your balance at the end of the billing cycle, plus a monthly finance charge. It could be as low as $10. You can use a credit card payment calculator to get an idea of what the minimum for your cards will be.
Normally, paying the minimum for credit card debt is not a good habit to follow. It doesn’t make a dent in your debt load, and it won’t stop your balance from creeping closer to the limit. However, when times are tough, it’s better for you to cover the minimum payment than risk missing a payment altogether. This small contribution could stop the creditor from taking further action against you.
This might sound counterintuitive, but you should let your creditors know when you’re having a hard time making payments. They could offer lower rates, defer payments or modify your payment schedule to help you.
The strategy is not only effective for cellphone and cable TV providers, but it’s also a potential option for dealing with student loans and the CRA. As long as you are honest about your financial hardship, you can come up with a compromise with your creditor to make repayments more manageable.
Debt consolidation is when you combine all of your debts into a single payment. You can do this through a debt consolidation loan, often provided through a bank or credit union. However, these come with high-interest rates, which may make it challenging to keep up with payments.
Another way that you can consolidate your debts for easier repayment is by filing a consumer proposal. A consumer proposal is a legally binding agreement where you promise to repay a portion of your unsecured debts for up to a maximum of 5 years. If you complete this repayment plan, your debts to your unsecured creditors will be considered paid in full. You can repay your debts and gain a level of financial stability that would be incredibly challenging to achieve all on your own.
If you’re interested in filing for a consumer proposal, book a consultation at David Sklar & Associates. One of our licensed insolvency trustees will assess your finances, see if you qualify for a proposal and explain the process to you.
Legal Action and Consumer Proposals
One of the main benefits of a consumer proposal is that it stops all of your unsecured creditors from taking collection actions. They are not allowed to contact you about the money that you owe. They cannot initiate any legal action against you, nor can they continue any legal action that was already started prior to filing the consumer proposal.
If you don’t qualify for a consumer proposal, declaring bankruptcy may be the next best solution. The moment that you officially declare bankruptcy, you’ll be protected from creditors taking legal action against you. Our licensed insolvency trustees can also guide you through the personal bankruptcy process from the moment that you file to the official discharge.
If you’re ever concerned that your debts are getting you into serious legal trouble, come to David Sklar & Associates. Our licensed insolvency trustees will look into your financial situation and help you find the best solutions for debt relief. You can get through this tough situation.