By Leah Ryder
As great as credit can be, all that money eventually needs to be returned to its original owner (and unfortunately, that owner isn’t you).
What happens if you can’t keep up with your debts? Failure to pay your bill by the due date over time can result in negative actions against your account, including mounting interest charges, penalties (such as an increased interest rate), damage to your credit score, and, ultimately, your card being cancelled.
The path to debt collection
Having a debt go to collections isn’t necessarily an indication of your failure as a person, or a defining moment that you’ll carry with you for the rest of your life.
Unexpected debts due to unforeseen illness, unemployment, veterinary bills or car trouble can come up at any time.
Once your monthly bill’s due date has come and gone without any payment, your account becomes delinquent.
Delinquent accounts that aren’t repaid may move into a new phase of debt recovery known as collections, and become collection accounts.
In the first three to six months of missed payments, your credit card issuer will likely try to collect the debt directly. They may have a dedicated internal department who will contact you about repaying the debt.
If you’ve fallen behind on payments for six months or more, your debt account may then be assigned to a debt collector, whose sole job is to get you to pay back the amount you owe.
There are different types of debt collectors:
- Collectors hired by the creditor and receiving a fee (or commission) from the funds they recover.
- 3rd party debt collectors are “sold" the debt account for a reduced price and gain their profit from the funds recovered above and beyond that amount.
What happens when your account goes to collection?
In Canada, once a creditor passes on your debt to a collection agency, they must notify you in writing. Once the account has been officially passed to the agency, you'll only be working with that agency to pay back the debt. The rules restricting what creditors can do vary by province, but in general, you can then expect outreach from the agency such as:
- Phone calls to your home or work.
- Contact with your employer, family, friends, neighbours or acquaintances to obtain your mailing address, phone number, or email address.
- Other types of outreach including emails and voicemails.
Collection agency practices vary by province, so review the rules for your place of residence. In general, a collection agency is bound by regulations that protect consumers from overly-aggressive collection tactics.
“The worst thing you can do is stick your head in the sand and ignore the collection calls,” says Jeffrey Schwarz, executive director of Consolidated Credit Counseling Services of Canada.
The main thing to remember is that the agency is simply trying to recover the money you owe to its client. Communication is the most important step you can take to help them help you find the best way to repay your debt.
Credit reports show collection records
Debts sent to collection agencies will remain on your credit report for about six years.
The Financial Consumer Agency of Canada (FCAC) says that Equifax will count that record from the date the debt is sent to an agency, while TransUnion counts it from the date the debt became delinquent (i.e. when you missed your payment due date).
This could make a significant difference, as many creditors attempt to collect debts in-house for up to six months before assigning the debt to an agency.
Collection accounts can really hurt your credit and will impact your score as soon as it’s registered on your credit report by the creditor and/or collection agency.
How to deal with debts in collections
If a collector is calling, here are some steps you may want to take:
1. Ask the collector who they’re calling on behalf of.
This can help you determine which account it is. Get information about the amount owing, the total time it has been delinquent and the agency name and contact information. Be confident that you do have rights in this situation.
For example, they may not contact you during certain hours on Sundays or holidays. In addition, unreasonable, undue, or excessive pressure or harassment techniques aren’t allowed.
If you have concerns about how the agency is treating you, here are some tips for how to officially report the situation.
Determine how you’d like the relationship to take shape moving forward. For example, you can legally request for a collection agency to contact you in writing only. Consumer Protection BC notes that once the agency receives this letter, they’re not allowed to contact you by phone.
2. Review your credit report as soon as possible.
This can help you figure out whether the debt is indeed yours. Fraud and identity theft are real risks that could assign debts to your report that aren’t actually yours.
If you think there has been an error, follow these guidelines from the Financial Consumer Agency of Canada for reporting the problem.
Using a service such as Credit Karma is a great way to perform these checks, since the inquiry is considered “soft” and won’t further penalize your credit score.
However, some debts in collection may not be on your credit report. Always ask a debt collector for written proof of your debt so you can verify that it’s yours.
3. Communicate your situation to the agency and, if applicable, the creditor.
The creditor has hired the agency to collect the money from you, so direct contact with the creditor may not be possible.
The ideal is to pay off your debt in full, but if that isn’t possible, you may be able to work out a repayment plan, such as manageable monthly payments, so that the collector doesn’t take you to court or sell your debt to another collections agency.
Remember that the creditor’s goal is simply to get their money back. They may be willing to alter the terms and conditions of the lending agreement to help you return the amount you owe.
4. Consider getting professional assistance.
Canada-wide debt assistance organizations such as Consolidated Credit Counseling Services of Canada or local not-for-profit credit counselling agencies can negotiate debt settlements on your behalf as well as help you establish a plan to rebalance and improve your finances.
There are both advantages and disadvantages to dealing with debt through an official debt management program; you can review them here as per the Office of Consumer Affairs.
5. Check your credit score regularly once you begin to repay your debt.
This can help you track how your score changes as the account updates and/or is removed.
Fearing who might be waiting on the other end of a phone call is no way to live. If you’re having a difficult time paying a bill, try communicating with the creditor or company early and often.
You don’t need to stay silent in the face of financial hardship and strengthen your case by familiarizing yourself with your rights.