Dealing With Collections Agencies - An Insider's View
One of the most common calls that our trustees receive are from people that are fed-up with collection agencies. Our guest on today's Debt Free in 30 show is Blair Demarco-Wettlaufer, a Managing Partner for Kingston Data and Credit, a Canadian debt collection agency. Blair gave us the ins-and-outs of the collection world, including the typical life of a debt once it has gone to a collection agency and tips on what your options are for dealing with collection calls.
How Do Collection Agencies Hear About My Debt?
A collection agency does just as their name suggests - they are contracted by companies to collect on outstanding debts. Think of them as "the middle man" between you and your creditor. A collection agency follows 4 basic steps from the time that they receive your debt, up to the time that your phone begins to ring.
- An account is contracted out to the collection agency by your creditor. Typically a collection agency is contacted by a creditor once an account is three or four months past due with no activity. Some companies wait longer if they have internal resources, but that is the average.
- The account is entered into the collection agency's database.
- A collection letter is sent to you by regular mail.
- Six days later, the collection agency begins calling every three business days.
Blair points out that in Ontario the Collection Agency Act of Ontario requires agencies to send a letter once they receive a file and to wait six days for a response before they begin calling the individual. This means that it is your right to ask the agent on the phone to re-send the letter if you did not receive one before they began their collection calls. You can ask for a copy by mail. E-mail or fax doesn't count unless you agree.
This letter serves a purpose in providing information you have a legal right to know including:
- how much the creditor says you owe,
- the name of the collection agency, and
- the name of the creditor that they are collecting for, and a statement that the creditor has asked them to collect the debt.
When Legal Action Looms
What happens if you can't pay the debt or ignore it all together? A consequence for not paying off a debt could be legal action taken by the creditor, or by an in-house paralegal team in some collection agencies. If your debt is large enough (generally over $3000) and you have stable income, it is possible that you may be pursued through small claims court.
There are certain circumstances when legal action cannot, or most likely would not, be taken:
- If the debt is over the 2 year mark outlined in the Statute of Limitations.
- If the debtor does not have stable income.
- If the debt is too small.
- If the creditor does not have the necessary valid documentation, signed contracts, or invoices.
In other words,
...there are a lot of things that have to happen realistically for legal action, rather than an emotional agent on the phone saying, 'I'm going to sue you if you don't pay this.
Negotiating a Payment Arrangement
Collection agencies get contracts for accounts that go unpaid and often their attempts at squaring up these debts go unanswered. However, is ignoring debt the way to go? Blair explains that,
A lot of consumers, actually about 60 to 70 percent of consumers, they play ostrich, they bury their head in the sand. They get a call and they ignore it or they get a letter and they disregard it.
You have options for dealing with your debts and taking a pro-active approach. If you would like to pay off all or some of your debt, Blair suggests that you should reach out to the collection agent and be honest about your situation. Don't make promises that you can't keep and be realistic about your offer. He outlines 3 options for negotiating with collection agents:
- Good Faith Payment - offer the agent a small amount of money to show that you're taking your debt seriously. By offering $50 with a promise to discuss your situation further in a couple of weeks, the agent knows that you are open to discussion. However, Blair points out that the Statute of Limitations in Ontario states that no legal action can be taken after 2 years from the date of delinquency or last payment. Furthermore, after 6 years the credit bureau reporting ceases. Keep in mind that if you decide to make a good faith payment, you are restarting both of those clocks.
- A Series of Payment Arrangements - these arrangements can be completed through post-dated cheques or pre-authorized payments. Blair warns us that the agreement should be conducted in writing (i.e. an email) and that any written cheques should be clearly identified as post-dated and to the correct agency's trust account.
- Lump Sum Settlement - Offer a one-time payment to clean up the debt. If you go this route, make sure to get a Conditional Letter of Settlement from the collection agency outlining the amount, date, your name, and that you are thereby released from the debt.
Collection calls are not uncommon today. In the past 3 years, Blair's office alone has seen 178,000 consumer files. When discussing the types of files that might end up at a collection agency, Blair emphasizes that,
I personally believe a lot of consumers ending up in collections, they're not bad people. Nine out of ten consumers ending up in collections are procrastinators, they don't understand their financial rights, they weren't aware of the debt, they've had bad circumstances happen, or they've reacted emotionally to a debt and they've made a bad decision.
Bonus Podcast Segment
After our radio broadcast I had a few more questions for Blair, including whether there are times that you should not pay a collection agency. Blair explained that you should not pay an agency if you disagree with the debt and can prove that it is not legitimate. For example, if it has passed the Statute of Limitations 6 year rule. After 6 years, the debt cannot be shown on your credit report and the opportunity for legal action has long since passed.
Keep in mind that there are exceptions for this example, including money borrowed from Credit Unions. They can enact a "wage assignment" (which is included in the contract that you sign at the time of borrowing) and take 20% of your wages for 10 years to clear up your outstanding balance.
For those debts already listed on your credit report, Blair explains that paying them will slightly improve your credit rating. However, once a debt is listed as a registered item (your inactivity has been flagged by a collection agency or creditor), it is usually too late for the debt to be wiped clean and it affects your overall credit score. He points out that,
The credit bureau isn't a snap shot, it's a regular reporting cycle.
This means that once your debt has reached this point, collection agencies do not have the authority to simply wish it away. Blair's point is that if you can negotiate with the collection agent before you get to this stage, it is worthwhile to avoid any reporting to the credit bureau. If a negotiation is not possible and you're getting nowhere by making the minimum payments, Blair acknowledges that it might be time to deal with those debts through a consumer proposal or personal bankruptcy.
Resources Mentioned in the Show
- Blair's blog at Kingston Data & Credit
- Blair Demarco-Wettlaufer Google Plus
- Collection Agency Act of Ontario
- Consumer Protection Ontario: Collection Agencies - Know Your Rights
- Equifax Free Credit Report
- TransUnion Free Credit Report