If you’ve fallen behind on your debts, you might be wondering what creditors can actually do to collect their money. Can they take your paycheque? Freeze your bank account? Send a torrent of nasty emails?
In Canada, creditors can employ a wide range of legal actions to pressure you into paying. Some of these require the court’s permission, while others don’t. In this article, we’ll break down what creditors can do if you don’t pay them, how to avoid legal trouble, and where to turn if you’re feeling overwhelmed.
What Creditors Can Do When You Don’t Pay
Creditors can pursue various legal actions when you don’t make your debt payments. Depending on their chosen method, a creditor may or may not require a court order to enforce the collection of unpaid debts.
Legal actions creditors can take without a court order
Generally, creditors attempt to collect unpaid debts without first obtaining a court order, as it is less time-consuming and requires less effort. While these measures don’t involve the courts, they can still have negative consequences for your credit, finances, and daily life. Below are examples of actions creditors can take without going through the court system.
Charging late fees. Most loan agreements permit lenders to charge late fees. If you miss a payment, these fees start collecting on your account, increasing your total balance. Over time, this can lead to a significant increase in your debt and a worsening of your financial situation. Late fees are calculated as a fixed amount or a percentage of the balance owed. Luckily, federal law in Canada prohibits lenders from charging late fees that are considered predatory.
Raising interest rates. If you fall behind on your debt payments, your lender may raise your interest rate. This interest rate is known as the penalty APR (adjusted percentage rate), one of the many hidden fees associated with credit cards. With a higher APR, a greater portion of your payment will go towards interest rather than the principal. As a result, paying off the balance will take longer.
Marking your credit report with a negative remark. Most creditors report your debt payments to credit bureaus like Equifax and TransUnion. Late or missed payments result in negative remarks on your credit report, which drags down your credit score. As a result, you’ll face challenges getting approved for credit cards, car loans, mortgages, and other loans. Even renting a home will become harder, as landlords may not trust you to pay rent on time.
Hiring collection agencies. If a creditor is unsuccessful in recovering the debt you owe, they can assign the task to a collection agency. These private companies collect unpaid debts on behalf of creditors—and they can be pretty aggressive and persistent. Luckily, collection agencies must follow strict rules that govern how and when they can contact you. Learn more about debt collection laws in Ontario and how to stop collection calls by filing bankruptcy or a consumer proposal.
Pursuing co-signers for payment. Has someone co-signed a loan you’ve stopped paying? Then the lender can legally chase that person for payment without needing a court order. A co-signer is responsible for payment even if you file for bankruptcy. Since they share equal responsibility with you for the debt, they’re exposed to the same risks that come with non-payment, including damage to their own credit score.
Cutting off services. In the case of service providers—such as phone, internet, streaming or utility companies—non-payment may result in the suspension or cancellation of services. The good news is you won’t get cut off right away, and you have certain rights as a consumer. For example, in the case of utilities, the provider must give you prior notice before withdrawing the service (such as 14 days in Ontario). Also, your electricity or natural gas also cannot be disconnected during the colder months.
Using the right of offset. The right of offset allows a lender to legally withdraw funds from your account to cover unpaid debt in another account. For example, let’s say you’ve fallen behind on payment for a personal loan from your local bank, where you also have a chequing account. In that case, the bank can take money from your chequing account and apply it against the loan.
Note: the Canada Revenue Agency (CRA) also has the right of offset. If you owe taxes you haven’t paid, the government agency can legally take certain benefits you receive and redirect the money toward your tax bill until it’s paid off.
Legal actions creditors can take with a court order
If you haven’t made payments to your creditor, their next step may be to take the matter to court, which can result in more severe financial consequences for you. The only exception applies to the CRA, which has the power to enforce unpaid debt without needing court approval. Here are the court-assisted options available to creditors.
Filing a lawsuit. Creditors can sue you in court to obtain a judgment for unpaid debts. Once they have that court order, they can pursue further legal action to collect what you owe, such as garnishing your wages or confiscating your property. Lawsuits filed by lenders to collect unpaid debts show up on your credit report and can stay there six years or longer.
Wage garnishment. A wage garnishment order requires your employer to withhold a portion of your paycheque and send the funds to your creditor. This process continues until the debt is fully paid off. Luckily, there are limits to how much of your paycheque can be garnished. For example, in Ontario, creditors can only seize up to 20% of your net wages. However, this amount can be as high as 50% if you owe money for child or spousal support. Learn more about wage garnishment rules in Ontario and how to stop a wage garnishment with a bankruptcy or a consumer proposal.
Seizing property. In some cases, a creditor can get a court order to seize certain assets you own and sell them to satisfy the debt. For a secured debt, such as a mortgage, this is a common practice: the lender can foreclose on the home or initiate a power of sale. Unsecured creditors, such as credit card companies, must first sue you and obtain a Writ of Seizure to take possession of an asset, such as a car or furniture. However, they are limited by what they can seize thanks to provincial exemption laws, which also apply if you file for bankruptcy.
Putting a lien on property. Unsecured creditors, such as credit card companies, can’t directly go after your assets, the way secured creditors can. That’s because there’s no asset acting as security for the loan. However, they can register a lien against your property, such as your home. A lien is a legal claim on an asset to recover an unpaid debt. That means you won’t be able to sell or refinance the property until you pay off the debt. They must first obtain a court judgement to be able to take this step.
Freezing bank accounts. A court judgment can empower a creditor to freeze your bank account, meaning you’ll lose the ability to conduct outgoing transactions, such as purchases or withdrawals. This tactic can catch you off guard, and it is very unpleasant, especially if you need the frozen money for rent, groceries, and other bills. Your creditor can request permission from the court to transfer funds from your bank account to pay off the debt. Any future deposits, including paycheques, are also up for grabs.
What to consider if you’re worried about creditors taking you to court
Do you have unpaid debts and are concerned that your creditors will take legal action against you, such as suing you in court? If so, don’t panic and consider the following.
How much debt do you owe?
Most creditors will avoid taking severe legal action against their customers because it’s a complicated and costly endeavour. They won’t take you to court unless they believe it’s worth their time and effort. Instead, they’ll focus on customers who owe a significant amount of money, especially those owing $10,000 or more. A creditor suing for a small amount (such as under $2,000) is rare.
How long have you owed the debt?
Time can influence the extent to which certain creditors can come after you for past-due debts. In each province, there’s a statute of limitations that prevents unsecured creditors from pursuing legal action against you indefinitely. For example, in Ontario, unsecured creditors have only two years to sue you for unpaid debts. After that, they lose the right to obtain court judgments (though they’re still free to use tactics like collection calls and hiring collection agencies).
Who do you owe the debt to?
Finally, you need to consider who you owe. A small creditor is less likely to sue you in court, but a large bank or government-backed creditor is. Likewise, the CRA has incredible collection powers and can pursue multiple types of legal actions against you for unpaid taxes. Secured creditors also have a direct claim on certain assets you own—it will be easier for them to repossess these to pay off the money you owe, compared to unsecured creditors.
How to avoid legal actions by creditors
Making your payments in full and on time is the best way to avoid situations where creditors take legal action against you to collect outstanding debts. Unfortunately, this goal isn’t always feasible. If you’re unable to make your payments on time, try the following strategies to stay clear of legal repercussions.
Revamp your budget. Examine your budget to find areas where you can decrease expenses. You could free up enough money to make larger debt payments. If you don’t have a budget or need help with tracking your spending, read our article on how to create a budget in five steps.
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; it could be as low as $10. This small contribution can stop a lender from taking further action against you. Additionally, it helps maintain a healthy credit score, as the card issuer will report your payment as being made on time.
Negotiate with creditors. Contact your creditors and inform them that you’re having difficulty keeping up with your payments. They could offer lower rates, defer payments or modify your payment schedule to help you out. It’s even possible to obtain financial relief for unpaid taxes owed to the CRA. As long as you’re honest about your financial hardship, you can come up with a compromise with your creditor to make payments more manageable.
Consolidate your debt. Debt consolidation involves combining your unsecured debts into a single payment, preferably at a lower interest rate than you currently pay. You can achieve this by taking out a debt consolidation loan, usually through a bank or credit union. However, depending on your income and credit score, your lender may assign you a high interest rate, which can make it challenging to keep up with payments.
Debt relief options that can stop legal actions by creditors right away
If strategies like debt consolidation and negotiating with creditors don’t work, you still have other options to prevent costly lawsuits, asset seizure, and other financial nightmares.
One solution is filing a consumer proposal, a legally binding agreement in which you agree to repay a portion of your debts to unsecured creditors over a five-year period. Besides a lower monthly payment than you currently pay, a consumer proposal prevents unsecured creditors from taking legal actions against you. It also stops court orders, such as wage garnishments, that were already in effect before the proposal filing date.
If you don’t qualify for a consumer proposal, declaring bankruptcy may be the next best solution. The moment that you file for bankruptcy, you’ll be protected from legal actions by creditors. In Canada, you must hire a Licensed Insolvency Trustee (LIT) to carry out a consumer proposal or bankruptcy on your behalf.
If you’re concerned that your debts are getting you into serious legal trouble, book a free consultation with David Sklar & Associates. Our Licensed Insolvency Trustees will review your financial situation and help you find the best solution for getting creditors off your back and eliminating your debt problems for good.
