A debt collection agency will often threaten to sue you to get you to pay your outstanding debt. While a collection agency does have the legal right to take you to court to collect on an overdue bill, the likelihood that they’ll act on this right is low if you don’t have assets or an income that can be garnisheed. You may also have an easy defense against a court action for an account in collections if the limitation period on that debt has expired.
I outline what happens when a collection agency takes you to court and what you can do to stop the court proceedings and stop collection actions.
Table of Contents
How debt collectors obtain files
There are two ways debt collection agencies obtain accounts of unpaid debt – either through assignments or they buy files.
Assignment of a debt means that a lender, like a bank or credit card company, has hired the collection agency to collect money on delinquent debts. In assignments, the collection agencies receive a commission, usually 30% of the debt they were able to collect on behalf of the bank.
Another way a debt collection agency can obtain unpaid debt accounts is by buying them. Lenders that are no longer trying to collect a debt will sell their debt accounts to a collection agency willing to buy them. The collection agency will then own the debt and begin contacting the debtor to recover money. This is often the case for very old debts which can explain why you may be receiving calls and collection demands from a debt collector after years of no contact.
Will a collection agency take me to court?
A collection agency is a business. Suing you will cost money on lawyers and involve time spent on paperwork, so it must be worthwhile for the debt collector to take you to court. Whether a debt collector will sue you ultimately depends on whether you have assets or earn a good income.
Debt collectors often threaten to sue you to get you to pay your outstanding debts. Collection agencies have the legal right to take you to court to collect overdue bills, but will they do that? If they sue you, what should you do? I’m Doug Hoyes a Licensed Insolvency Trustee with Hoyes, Michalos & Associates, today I’m going to talk about dealing with threats of legal actions from debt collectors. The likelihood of a debt collector suing you is very low. Suing someone costs money, there will be costs for lawyers, paperwork and court fees. A debt collector will weigh those costs against how much they think they can collect. Now it is very common for a collection agent to threaten to take you to court, but most of the time they don’t actually start legal action. Why? Well, most common reason for now suing you is that your debt is too small. The cost to take you to court may be more than what they think they can collect. So, it doesn’t make good business sense to sue you. Collectors also won’t bother to sue if you are considered creditor proof. You are creditor proof if you don’t own any assets that can be seized, or don’t have any income that you can garnishee. We have an entire video on understand when to ignore creditors because you are creditor proof. I’ll put a link to that video at the end of this one. Another reason a creditor likely won’t sue you is that you live outside of Canada. To sue you the creditor would need to take you to court in Canada and in the country where you live. This can be extremely costly, involving double sets of courts and lawyers, so it would take a very large debt to make this worth the effort. The final and most important reason to not expect legal action is that your debt is too old. Every province in Canada has a limitations act that defines the time limit for a creditor or collection agent to use the courts to collect. In Ontario, this time period is 2 years. If a creditor tries to sue you after the two-year mark, you can file a Statement of Defense saying the debt is past the limitations period. The limitations period doesn’t apply to all debts, so before you decide to just ignore a debt because it’s old, you should seek professional advice. Again, we have a complete video on the Statue of Limitations linked to at the end of this video. So, now we know when a debt collector might not take you to court, what do you do if your debts are large enough or new enough, that they will? If a creditor decides to purse you through the court system, they will send you a notice of legal action, or a statement of claim. You have a set time limit to dispute or accept this claim, in Ontario it’s 21 days. You need to issue a statement of defense or attend the trial to tell your side of the story. If you don’t, court will likely rule in favour of the creditor. If a court rules for the creditor, the court will issue a judgement, this is a court order stating that the debt is legally owed by you and gives the judgement creditor the legal right to take legal action to collect. If the creditor wins the case, they can garnishee your wages, freeze your bank account, seize non-exempt property, or file a lien on your property. You can stop these legal actions by paying off the debt, or if you can’t afford to, by filing a consumer proposal or bankruptcy. Both options provide an automatic and immediate legal stay of proceedings, protecting you from any actions a debt collector might take. If you need more advice on dealing with debt collectors, watch the videos linked to at the end or visit us at hoyes.com.
There are a few reasons why a collection agency will only threaten to sue, but not follow-through on taking real legal action:
- Your debt is too small. Most large creditors will avoid lawsuits where an unpaid debt is below a certain dollar amount. The reason being they don’t think it’s cost-effective to go after a loan of only a few hundred dollars when they will be spending that amount on the legal action alone.
- You are considered creditor proof. If you don’t own any assets or you do not have income that can be garnisheed, it’s not possible for debt collector to recover any monies from you even if they take you to court.
- You live outside of Canada. If you owe money to a Canadian creditor, it’s highly unlikely that you will be sued while living abroad, even if you still receive phone calls from Canada. The primary reason for this is that your creditor would have had to first sue you in Canada and then have to bring the lawsuit over to your current country of residence. As this can be a complicated process, Canadian creditors generally don’t sue you if you live in another country.
- Your debt is too old. Technically debt obligations never expire, and debt collectors can attempt to collect the debt for as long as they want. However, every province in Canada has a statute of limitations on most unsecured debts which prevents creditors and debt collectors from successfully taking legal action after a specific amount of time has passed. This is sometimes also called time-barred debt because it is no longer legally collectible after a certain number of years have passed. In Ontario, the statute of limitations is two years. If a creditor does sue you after the two-year period, you can file a Statement of Defense saying the debt is past the limitations period.
So how often do debt collectors take people to court? Rarely. The debt collector will only sue you through the courts if they expect to collect more in fees than they will incur in legal and court costs.
What happens during the court process for debt collection?
The debt collection process for late payments generally follows three stages.
Initial collection attempts
In stage one, your creditor or collection agency will attempt to contact you to arrange a new payment plan. If your account has been transferred or sold to a collection agency, they must first send you a written notice indicating what agency they work for, the name of the original creditor, account number, when the account was transferred and the amount you owe. Five days after sending this notification they are legally allowed to call you. The longer your account is overdue, the more aggressive you can expect creditor calls and letters to become.
Court proceeding & defense
If a creditor or collection agency decides to pursue you financially through the court system, they will send you a notice of legal action or statement of claim. You have 21 days from the time this claim is mailed to dispute a debt or accept the claim.
If you do not respond with a Statement of Defense within this time period or attend the trial, the court will likely rule in favor of the creditor.
If you do owe the specified debt and do not present an appropriate defense, the judge will likely sign a Judgement Order. This is an order indicating that the court acknowledges the debt is legally owed by you and gives the judgment creditor the legal right to pursue other means of collection.
Pursuing legal recovery options
If the collection agency wins the case and receives a default judgment against you, they will take steps to recover the debt including:
- Request that the court to issue a garnishment order so they can garnish your wages;
- Freeze your bank account and issue a demand to your bank that any monies deposited in your account be directed to them.
- Obtain a Write of Execution allowing them to seize non-exempt property which they will sell to repay the debt. It is even possible for unsecured creditors to attempt to seize your car for an unpaid debt.
- File a lien on your property which will remain and must be settled prior to any sale.
What do I do if I have a judgment against me?
Make a settlement offer or create a repayment plan
If you can afford to pay the money owed, you can still make a settlement arrangement directly with the debt collection agency. Based on your financial situation, you can start with a partial payment then work out a monthly payment plan. Make sure to get all agreements in writing. If the debt is old, or if the agency has purchased the debt for cents on the dollar, you may be able to make an offer for much less than you owe.
File for consumer creditor protection
If a creditor or debt collector has proceeded to file a lawsuit and obtained a judgment against you, you are likely at the stage where you cannot afford to repay the debt. You may also have other debts that are causing you financial problems.
You can stop these legal actions by filing a consumer proposal or bankruptcy.
Both options provide a legal stay of proceedings. A stay in bankruptcy or consumer proposal means that unsecured creditors and debt collectors are prohibited from launching or continuing lawsuits. The stay is automatic and happens as soon as you file.
While in many cases a collection agency is only threatening a lawsuit, if your debt is not past the limitations period and you own assets or earn an income, it’s very likely that the debt collector will pursue you in court and obtain a judgment against you. If you’ve received written notice of a court application, act before facing garnishment, a bank account freeze, or a lien on your property.
Contact us today to meet with an experienced trustee who will take the time to review your debt situation and explain all of your options to stop any collection actions and deal with your debt. Your first consultation is always free.
Tune in to the podcast episode below.
Doug: We’ve had a lot of long shows recently so today we’re back for a quick Technical Tidbits Edition of Debt Free in 30 where we answer one question from our listeners. Today’s question, can a collection agency take me to court? Pretty simple, so Ted Michalos, my Hoyes Michalos co-founder and business partner is here. So Ted, to start is being sued by a collection agency something to worry about?
Ted: Right. So I’m going to describe it as they have the legal right to do it but it’s not something they do very often. So it’s a question about perception versus reality, what do they do in practice versus what are they going to threaten you with in their cover letters or emails.
Doug: So you talk about threatening. How often have you had a client sitting in front of you who’s said I’m getting these calls from a collection agency and they’re going to take me to court?
Ted: What time is it?
Doug: Yeah, exactly, right. All the time it’s a very common thing.
Ted: Anyone who’s dealing any way with collection agency’s it’s the most common thing they do. You’ve got to pay me by Friday or I’m taking you to court.
Doug: Okay, so let’s start with the basics here then because I think once everyone understand how a collection agencies work the answer to this question is pretty easy to understand. So there are two ways that collection agencies get debts to collect, they’re either assigned them or they buy them. So what’s the most common of those two scenarios?
Ted: So the most common one is the assignment. And what that means folks is that a company, a big bank, a utility, whomever it is, hires the collection agency to do the dirty work for them. So the Royal Bank doesn’t want to be calling you trying to collect your debts, they don’t want to hassle you but they would like their money back. So they will assign the debt to a collection agency that’s working on commission to try and recover the money.
Doug: That’s working on commission, so that’s how it works then.
Ted: Right. Well and a critical component of that is so they only get paid if they collect some money. And so the decision for them well, do they take you to court? Well they certainly threaten it but unless they’re certain that they’re going to get paid or the bank is authorized them to spend the money they’re not likely to do it.
Doug: So let’s talk through the sequence here. I’ve got a credit card with a big bank and something happens that I’m not able to pay it. So, the first month I miss my payment there’s going to be a note on the statement that says hey, you probably forgot to make a payment.
Ted: It’s a polite reminder the first time.
Doug: A polite reminder, no big deal.
Ted: Unless it’s a US credit card then it’s less polite.
Doug: Okay, so then the second month I’ve missed a payment it’s much less polite, it’s a more forceful –
Ted: Usually the second month there is an individual letter or notice and possibly there’s a phone call even from Canadian banks.
Doug: And by the third month okay they’ve –
Ted: Now the third month they’re losing patience with you. And they’ve got to decide do we continue to contact you, which is bad for our business relationship or do we hire somebody else to be the nuance?
Doug: And so very common that around month three, four, five six, they make the decision you know what, this isn’t salvageable we’re sending you to a collection agent.
Ted: Yep and they’re tax implications for them too, right? Now they’ve sent it off to collections, it’s now doubtful, there’s a basis for them sending some of this off for their taxes, even if you do pay them, it’s an accounting thing but there are reasons for doing it.
Doug: So somewhere let’s day it’s month four, five or six, I get contacted by a collection agency so that would be what we call the first hand off and that collection agency is dealing with a warm body, you were current up to a few months ago so the commission they’re going to earn it’s not a huge commission because it’s a relatively simple debt to collect, so I don’t know what they get, I’m not privy to this but maybe it’s a 10%, 20%, 30%.
Ted: I think it’s 30.
Doug: So let’s say it’s a 30% commission. So the collection agency is calling you, they want to collect their money and you said it’s unlikely they will take you to court because of math. They’re only going to get 30% of the money and it costs them something to take you to court.
Ted: Yep and they’re not sure that you’re actually going to pay. So I mean there’s some candidates that are better to be taking to court than others. You got a high paying job, they know you’ve got lots of assets or something, but these are people that usually have paid their bills.
Doug: Right. So, if I’m a collection agency I don’t want to pay the court fee, because to sue someone you got to pay a court fee.
Ted: Plus there’s the time of preparing the documents and all that work.
Doug: Lawyers fees, I probably have to serve you with the documents, so maybe it costs, I don’t know, a couple of hundred bucks, a few hundred bucks, whatever it is, to go the court process. And if I don’t collect I’ve just wasted that money and if I do collect I’m going to get 30% of it because that’s the deal I have with the bank, that’s why collection agencies typically are not going to take you to court.
Ted: Right, it’s just not likely.
Doug: It’s just not likely.
Ted: And think it through folks, the courts are already backed up with the collection agencies at most suing, I don’t know, one out of 20 people, I don’t know, I don’t even think it’s that high. So if they sued everybody can you just imagine how long it would take?
Doug: Well and I think collection agencies when they are collecting on behalf of a bank sue virtually no one. It’s highly unlikely; I think it’s probably more like one in 10 thousand as opposed to it’s a small number. Now there’s a second scenario though and that is where an agency has purchased your debt.
Ted: And this is more common than you might think but they’re always blocks of old accounts. So I’ll give you an example, Canadian Tire every month will put together a block of old accounts, things that they’ve given up on, and they sell them for what, three, four cents on the dollar? They get companies to big on buying them. And once those companies buy those debts then they have the right to try and collect on them. Now there are some complications under the law for these things but those are the guys that are more likely to sue.
Doug: Okay, so let’s break that down and we used that company as an example but we’ve seen it pretty much with every company, every bank, every credit card company.
Ted: Everybody does it.
Doug: So they’ve decided you know what, we can’t collect it. So the normal sequence of events would be the original bank, the original credit card company, takes three to four months tries to collect, doesn’t get anywhere, they send it to a collection agency, they don’t get anywhere it comes back. At some point they say you know what, maybe it’s been a year, maybe it’s been two years, we haven’t collected, we don’t think we’re going to collect, let’s see if we can sell it to someone.
So a debt buyer comes in and says great, I will take all of your accounts that are between 18 months and two years old or whatever. And we’ll give you three cents on the dollar, four cents, five cents, six cents, whatever it is. So if that happens does that increase the chance that they will sue you?
Ted: I think it increases it certainly over the ones that are assigned. I still don’t think there’s a big chance of being sued but it’s bigger than it was under the first scenario. Because now they actually own the debt, they’ve spent some money and so now they’re trying to recover money. In the first one they’re getting paid a commission so they’re not out of pocket yet, the second one they’re out of pocket, they’ve paid for something so they want their money back.
Doug: And if they’ve paid let’s just say five cents on the dollar for it.
Ted: Which would be phenomenal.
Doug: You know, and they can collect from you and get 100 cents they’ve just made a huge profit.
Doug: And so is it worth it to spend a few hundred bucks on lawyers and lawsuits? I guess that’s a business decisions that they have to make.
Ted: And again so they’ve got – there are some people that are more likely to be sued than others. And it kind of depends on your unique situation, if you’re on some sort of assistance or pensions, you’re not a good candidate to get sued if you are earning a decent living, you’re a single adult, much more likely.
Doug: Yeah. And so what they assume do, and this is all speculation on my part because I don’t work for a collection agency, but what I would assume they do is run credit checks on everybody and go okay, let’s pick people who are a certain age range because if you’re over 80 years old the chances of you having a fulltime job that we can collect on are probably pretty slim. And let’s see if there’s any recent other history do you have other debts that are still current, what kind of job situation do you have? We pick the targets and then we go after those people.
Now you and I were just looking at some paperwork before we turned the microphones here of exactly that scenario. It was somebody who’s come in to see us who is getting sued for an old debt.
Ted: That’s correct.
Doug: And we’re not going to mention the name of the company but it was a debt from awhile ago, a debt purchaser bought it and it is now that debt buyer who is suing them.
Ted: Trying to recover it, that’s right.
Doug: Now you said something else a minute ago and that was that sometimes there’s legal complications to all of this, so what were you alluding to there?
Ted: There’s something in Ontario, and in every other province, they’ve just got different names, call the Limitations Act. So in Ontario the Limitations Act gives you a defence if you’re being sued and it basically says if you haven’t confirmed the existence of a debt in two years then your defence is you thought the debt was gone, I mean that’s in layman’s terms. Now confirming the debt, most people take that to mean you’ve made a payment but if they’ve got a recording of you saying yes, I know I owe you the money or something in writing, that would classify as a confirmation as well.
Doug: Yeah, the most obvious scenario is I made a payment on it.
Doug: So I wouldn’t be making a payment on it if it wasn’t. I mean talking to someone on the phone –
Ted: Well but one of the reasons they all tell you they’re recording calls is because it may very well be that you say yes, I know that I know you, I’m going to give you something by Friday. Okay, now I can use that against you.
Doug: Yeah and whether they would do that in court or not, I mean we already said that the chances are pretty unlikely. But if a debt buyer has purchased debts from a couple of years ago, and it would make perfect sense for a bank or credit card company to sell them because they know I can’t really take someone to court for them because it’s too old.
Ted: I’ve already written them off.
Doug: I’ve already written them off. So, you know, if I get two cents on the dollar that’s two cents more than I was getting. The debt buyer now though well, hey maybe I’ll take them to court. And so I think with the Limitations Act you spelled it out very clearly, it is a defence.
Doug: So anybody can sue anybody for anything, oh the sun’s shining today, I think I’ll sue you. So the fact that the debt is two years old doesn’t mean I can’t sue you for it.
Ted: Yeah, it’s not a statute of limitations saying the debt is gone, it’s saying that the court will not compel collection, that’s a whole different thing.
Doug: Hugely different.
Ted: So it still shows up on your credit bureau, the debt is still there, it’s just that if you put up any kind of defence as in hey, wait a minute it’s been more than two years, the court won’t let them take anything from you.
Doug: Now of course you have to know there’s a court hearing.
Ted: Right, so they’ve got to know how to find you.
Doug: And so I mean it’s something we’ve seen many times as well where when they go to court and say well, we tried to find the guy but we sent it to his last known address, we don’t know where he is and so of course the court isn’t going to say well how old is this debt, is it passed the two year limitations period?
Ted: The court doesn’t care.
Doug: The court doesn’t care. The court says okay, boom, here you go, here’s your judgment.
Ted: And the standards are a lot lower in small claims court, I mean you just hit on it, small claims they’re only required to send notice to the last address of record. That’s debts under $25,000, debts over $25,000 they actually have to serve you. So you’re less likely to be sued for debts – if they’re going to sue you it’ll be in the first two years.
Doug: And we’re giving you Ontario law here, Ontario Canada as we record this in early 2019 that may be different in whatever jurisdiction you’re in. So, is it more likely you would get sued for a $5,000 debt or a $50,000 debt?
Ted: So if you’re going to be sued for a $50,000 debt it will be done within the first two years and it will because the creditor, whoever you owed the money to, assigned it to a law firm, not to a collection agency. If you’ve got a debt in a collection agency for $5,000 and it’s two or three years old, they might sue you, more likely they’re going to ask you to try and settle for a thousand or $1,500.
Doug: Yeah and sometimes the lawsuit is more of a threat but it’s – if it’s a small enough amount then you’re probably not going to put up as big a defence than if it was a much bigger amount and if you owe –
Ted: Well, that’s one of their tricks.
Doug: That’s the trick exactly.
Ted: You owe me $1,500, they’ve actually bought it for $50 but they’ll settle with you for $500, great deal for everybody.
Doug: Great deal for everybody. So okay, so let’s summarize all this then. With respect to the limitations act in general they’ve got to sue you within two years but you have to actually show up in court and defend if they –
Ted: It’s an active defence; it’s not an automatic defence.
Doug: And one of the ways to defend yourself in that case would be to get a copy of your credit report, which shows the last activity date and you go to court and you say look the last activity date was three years ago judge. Okay, so then the judge would throw it out assuming the judge knows the law, so highly unlikely that a big bank would be suing you after two years. Well, we just looked at a piece of paper of someone who’s being sued for a debt that was purchased two years ago so it’s more likely that that’ll happen. So grand summary then, the question was is it likely that a collection agency will sue you?
Ted: So, the question was can a collection agency sue you? Yes, they can but it’s not likely.
Doug: And so if someone has been contacted by a collection agency who says we’re going to sue you, you owe us all this money, what advice would you be giving that person?
Ted: So if you only have the one debt that you’re in trouble with, and most of the people that we talk to, it’s multiple debt so we’re going to give you a different answer in a second, you’ve only got one debt you’re dealing with a collection agency, maybe you take the time to talk to them. Maybe if it’s a one off you can deal with it and probably they’ll settle. Most of the folks we talk to it’s not one, it’s two, it’s three, it’s four, it’s because there’s been a ripple effect. It’s one of those unattended consequences I haven’t been able to pay this bill, I borrowed from that one and so now you’ve got a number of different items in collections.
Well so the correct answer here is not to deal with the collection agency, the answer here is to deal with your debt problem, which means well, contacting someone like us. Are you going to file for a consumer proposal, maybe are you going to file for bankruptcy, maybe you just need somebody to help you sort this stuff out.
Doug: And is your answer different if I’ve already been sued?
Ted: No, I mean if you’ve already been sued – again if only one person has sued you, the risk you run now is you’re going to have your wages garnisheed or your bank account frozen. But if one person has sued you probably someone else is going to make that same decision as well and so you’re already at the point where you should be seeking professional help. And that’s not just me trying to sell my services.
Doug: Well it’s actually the truth.
Ted: You got a tooth ache you go see the dentist, you got a debt problem you go see someone to help you with your debt.
Doug: So it’s fairly simple then. If you’ve got one collection agency after you and let’s say it’s an old cell phone bill, we see that all the time. So okay, it was originally $500 now they say it’s $1,000 they’re probably not going to take you to court for that but it’s also probably something you can deal with on your own, you talk to them and say look guys, how about I give you $300, let’s make a deal, whatever. And you want to make sure you do it in the right way, get them to send you a letter saying $300 is full and final settlement and all the rest of it.
If you have three or four of them and in most cases what they want is a lump sum, they don’t want $50 for the next two years, they want $300 right now. So if you can’t settle with all of them, then, you know.
Ted: What’s the point of settling with any of them if you can’t settle with all of them?
Doug: Yeah and in fact you’d probably make it worse, you now settle with one of them and that reflect on your credit report that you paid it and now all the rest of them know he’s got money and boom you’re getting calls from everyone. So if you have multiple debts and they’re now at the collection agency stage then yes, it’s probably better to look at a bigger picture solution and deal with all of them.
Ted: That’s right, it just makes more sense.
Doug: And a consumer proposal or bankruptcy will stop a lawsuit.
Doug: It will stop – even if you’ve already got a judgement against you.
Ted: Yeah there’s something called a stay of proceedings, it’s an automatic provision in the law, so it means that a creditor cannot advance any sort of legal situation further. So if they haven’t started it stops them from actually commencing, if they’ve already started it stops them in their tracks, if they already have a judgment against you, it stops it from being enforceable. If they’re already garnishing your wages, it stops them from garnishing your wages.
Doug: And that’s a key point because a lot of people think well, they’re already garnishing my wages, nothing I can do now, I wish I dealt with it before it went to court. Well no, it doesn’t matter what stage it is, obviously the sooner you deal with it the better.
Ted: And the reasoning is this, they’re stopping that one particular creditor because the assumption is you’ve got multiple creditors. And there’s no reason why that one creditor should be treated better than everybody else.
Doug: Everyone gets treated the same.
Ted: That’s right.
Doug: Excellent. So there you go, there’s the answer to both will a collection agency sue you and can they sue you?
Ted: And what do you do if they’re – if you’re in that kind of situation?
Doug: Yeah and be proactive, you know, sitting there waiting for it to go away is not the solution. Excellent, Ted thanks very much. That’s our show for today. Thanks for listening, until next week I’m Doug Hoyes, that was Debt Free in 30.