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.
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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 when you don’t pay ultimately depends on whether you have assets or earn a good income.
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 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.