When a debt you owe becomes way overdue, your creditor may send it to a collection agency. The role of a collection agency is to extract payment from you using whatever measures are necessary and legal. In addition to aggressive collection calls, they may also pursue legal action against you, like wage garnishment.
Not surprisingly, being chased by a collection agency can leave you feeling stressed, frustrated, and helpless. So, to end this madness, you should pay the debt you owe as soon as possible, right?
It’s not always wise to pay a debt collection agency, even though that may be your first instinct. Depending on your circumstances, doing so may only worsen your financial situation and compound your problems.
In this article, we’ll explore how doing the “right thing” by paying a collection agency may not be the ideal course of action.
What happens when your debt is sent to a collection agency?
If you have an outstanding debt that’s way past due (usually 90 to 120 days), your creditor may decide to send your account to a collection agency in the hope they can recover all or a portion of what you owe. They can do this without obtaining your permission.
A creditor can transfer debts to a collection agency in one of two ways: assigning the debt or selling it.
In a debt assignment, the collection agency will work to gather payment on your creditor’s behalf. Your creditor still retains the rights to the debt, so they receive any funds collected. The collection agency gets to keep a percentage as a fee for their services.
If your creditor sells your account to a collection agency, they surrender all ownership rights to the debt. The agency will attempt to retrieve the amount owed and keep all the proceeds. Under this scenario, you no longer owe your creditor money – only the collection agency.
Once the collection agency assumes control of your debt, they’ll notify you of the fact through a written notice (called a debt validation letter). From there, they’ll begin their collections efforts, which may include making frequent phone calls asking for payment to filing a lawsuit.
What’s the impact on your credit score?
When a lender transfers your account to a collection agency, credit bureaus (Equifax and TransUnion) will be notified and record the action on your credit report. You’ll receive an R9 credit rating, the most severe in Canada. Credit bureaus assign the same rating to bankruptcies.
As a result, your credit score will take a substantial dip, making it more difficult for you to qualify for loans at low-interest rates.
An account sent to the collection will remain on an Equifax credit report for six years following your last payment and seven years on a TransUnion report.
What are the consequences of not paying a collection agency?
The longer you abstain from making a payment on your debt, the more severe the action the collection agency may take to recover the money.
After collection calls, emails, and other payment reminders have failed, the agency can file a lawsuit against you. You can dispute the debt in court, but the collection agency will easily win its case if you rightfully owe the money.
After the court confirms you owe the unpaid balance, the collection agency can apply for a separate court order to freeze your bank account or garnish your wages.
Why it may not be worth paying a debt collection agency
It may seem sensible to pay a collection agency to stop those pesky collection calls and avoid possible legal action. However, in some instances, you’re better off not paying. Here’s what you need to know before deciding whether or not to comply with a collection agency’s demands.
Paying off the debt won’t boost your credit score
Settling your unpaid debt by paying the collection agency won’t directly improve your credit score. An R9 rating will remain on your credit report for at least six years from your last payment, regardless of whether you pay off your balance. Paying the collection agency won’t reverse the damage to your credit already done.
Making a payment will take you longer to repair your credit
Paying a collection agency will lengthen the time your debt remains on your credit report. As noted, an account sent to collections is purged from your file after at least six years. But this time frame is based on the date of your last transaction.
Suppose you make a payment anytime during this crucial period. In that case, the collection agency will report the activity to the credit bureaus. Unfortunately, this will restart the six-year waiting period. Not good!
By continually resetting the debt clock through partial payments, it’ll take more than six years before the debt disappears from your credit report. As a result, it’ll be a long time before you get a chance to rebuild your credit score.
Collection agencies have a limited time to take legal action
While a collection agency has the right to sue you to recover the debt you owe, they have a narrow window of opportunity in which to do so.
The statute of limitations for debts in Canada states that general creditors can sue you for unpaid unsecured debts up to a maximum of six years. However, each province has its own statute of limitations, which can be considerably shorter.
For example, in Ontario, a collection agency has two years from the date of the last account activity to commence legal action. Once this period expires, they can no longer take you to court.
It’s important to remember that conducting an activity on your account will reset the statute of limitations if the maximum period (2 years in Ontario) has not been reached. This is a major reason why you should avoid making a payment to a collection agency.
In addition to payments, doing any of the following will reset the statute of limitations:
- Negotiating a new payment plan
- Acknowledging the debt
- Entering into an agreement to pay
- Accepting a settlement offer
Collection agencies may attempt to coax you into making a small token payment. Or they may offer you an enticing payment schedule in the hope that you agree to the terms in writing. But the purpose of such tactics is to reset the limitations period, so they have more time to take legal action.
For this reason, you must be aware of your last payment or other account activity before you respond to any requests or inquiries. Don’t let the collection agency keep resetting the limitations period.
The final reason for not paying a collection agency is that you may be able to settle the debt for a smaller sum than your currently owe. For example, you can contact the debt collector and see if they’d be willing to forgive a portion of the debt. Or you may want to file a consumer proposal.
Factors to consider before deciding whether to pay a collection agency
As explained earlier, there are valid reasons for not paying a collection agency.
However, collection agencies can be very cunning and persistent. Ignoring their demands risks facing a lawsuit, wage garnishment, or a bank account freeze. All of this can occur before your province’s statute of limitations expires.
It’s up to you to weigh the risks of paying vs not paying a collection agency. Here’s what factors to consider before making your decision:
- Size of the debt. Generally, the smaller the debt you owe, the less likely the collection agency may decide to sue you.
- Date of your last account activity. Remember, unpaid debts are wiped from your credit report after six years. If you’re already five years in, simply waiting it out is wise.
- Statute of limitation expiry date. As your debt approaches the statute of limitations expiration date, the threat of a lawsuit diminishes. Once it expires, the collection agency loses tremendous leverage over you.
- You own no assets and have no income. If you have no assets or income the collection agency can seize, you have nothing to fear from a lawsuit. You’re considered “creditor-proof.”
- You have options for debt settlement. Sometimes, you can arrange a debt settlement where you pay less than what you currently owe.
- The collection agency can’t prove you owe the debt. If you’re skeptical about an agency’s claim that you owe them money, ask them to provide proof. You can safely ignore their payment requests if they cannot do so.
Other ways to deal with debt sent to a collection agency
Here are some alternative options to explore to deal with debt you owe to a collection agency:
Debt settlement. Negotiate with the collection agency to pay less than the total amount you owe. However, such agreements don’t guarantee protection from lawsuits, garnishments, or collection calls. The collection agency can still employ these tactics at its discretion.
Debt management plan. A debt management plan (DMP) is a debt repayment arrangement done with the aid of a nonprofit credit counselling agency. A credit counsellor will work with the collection agency to reduce or waive future interest charges and late fees. However, you’re still required to repay the entire principal. In addition, any debt repayment plan under a DMP isn’t legally enforceable – the collection agency can opt-out at any time.
Consumer proposal. A consumer proposal is a federal debt-relief program that allows you to discharge your unsecured debt by up to 80%. You’ll pay down your remaining debt under a single monthly payment over five years – and no interest charges will accrue. It also offers legal protection from creditors and collection agencies.
Bankruptcy. Filing bankruptcy will eliminate your unsecured debts, immediately stopping collection calls and allowing you to rebuild financially from the ground up. However, you should not pursue bankruptcy lightly, as it has some significant downsides.
While paying a collection agency and stopping those dreaded collection calls may be tempting, it’s not always in your best interest to do so. Consider the factors outlined in this article to weigh the costs and benefits of paying off your overdue debt.
Sometimes doing nothing is the best solution. And remember: In Canada, you have many debt relief options at your disposal.
If you need guidance on resolving debt held by a collection agency, book a free, no-obligation consultation with David Sklar & Associates. One of our knowledgeable and passionate Licensed Insolvency Trustees can help you find the ideal solution.
Photo by Nicola Barts