If you fail to make your debt payments when they become due, your creditors can and will take steps to try and get their money back. Actions can range from sending your account to collections to garnishing your wages and seizing assets. Here is what you need to know can happen if you don’t pay your debts.
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Where are your lender’s rights?
Your credit card, loan or mortgage documents set out your lender’s contractual rights and remedies in the event of default. Creditors also have the right to pursue you through the court system.
A secured creditor, like your mortgage or car loan lender, has additional rights to seize property listed as collateral in your loan agreement.
In contrast, unsecured creditors, such as credit card debt and payday loans have no collateral, but that doesn’t mean they can’t enforce collection in some way. While they cannot repossess items you purchased with the money, they or their debt collector can sue you through the courts.
Government creditors like the CRA have enhanced collection powers that allow them to seize assets and keep your tax refund without court proceedings.
What can happen if you don’t pay your bills?
A late payment or two does not mean a creditor will immediately call in a collection agency or take you to court. Creditors will start by contacting you themselves to arrange a repayment plan. Don’t ignore these early warning signs. Failing to work with your creditor will ensure they escalate the situation further to recover money if you have not paid your debt.
If you choose not to reply to your creditor’s initial requests for repayment, then they can carry out some of the following legal actions:
- Placing a negative mark on your credit report
- Charge late payment fees
- Increasing your interest rate
- Sending your account to a collection agency
- Freezing your bank account
- Seizing assets
- Wage garnishment
Below I review how these different actions work and the implications for you financially.
When you miss a payment, and the account is past due, it is considered delinquent. It’s not unusual to accidentally miss a payment by a couple of days. If you respond to the initial email reminder that your payment is late and pay up, in most cases, your credit will not be affected. Most creditors will not report a late payment until at least 30 days after the due date.
Late payment penalties
Almost all loans have late payment penalties. For example, your credit card company may charge a late payment fee of $35, even if you are only one day late. If this was an error and you have a relatively good history with your creditor, you can sometimes get them to waive this fee. However, multiple late payments get very costly.
Some lending agreements also have interest rate escalation clauses, which state that, in the event of a missed payment, your low rate will increase. This is especially true if you have an introductory or teaser rate credit card.
Sending your account to a collection agency
After initially trying to collect themselves, creditors may send your debt to a collection agency. Legally they can send your account to a collection agent once it is over 30 days past due; however, most creditors will hold off outsourcing collection for 90 to 180 days. For accounts that are significantly past due, companies prefer to use outside agencies to save costs and to preserve their reputation. Collection agencies are generally more aggressive when making contact because they get paid by commission.
It’s less than ideal to have your debts sent to collection agencies because this creates another negative mark on your credit score. The individual credit account, or debt, will be marked as ‘in collection’. Collection accounts will remain on your credit report for six years.
It’s worth noting that collection agencies must legally follow all debt collection laws, such as only contacting you at certain times and on certain days. If you are receiving collection calls, it’s essential to know how to deal with a collection agent. Nevertheless, repeated collection calls are much more stressful and harder to ignore than the occasional late payment notice.
Commencing legal action through the courts
If you have not made payment arrangements, your creditor’s next step may be to threaten you with legal action. The purpose here is to pressure you into paying the funds back if you are financially able, or to begin the legal process needed to realize on any security or garnish your wages.
A collection agency can sue for an unpaid debt, however suing someone for not paying their debts takes time, effort and money for legal fees. This means that it’s not going to happen over a few outstanding utility bills or a couple of hundred dollars in credit card debt. You can, however, expect to be taken to court if you have a decent amount of outstanding debt at typically $10,000 or more.
For unsecured debt, there is also a statute of limitations that prevents creditors and debt collectors from successfully taking legal action after a specific amount of time has passed. In Ontario, that limit is two years.
Obtaining a Judgment Order
The initial objective of a lawsuit is to obtain a judgment order from the court, confirming that you legally owe the money and must pay it back. You can defend a lawsuit either by proving you do not owe the debt or by claiming the debt is past the limitation period. Of course, it’s also possible to stop the action by paying the debt if you can.
If you’ve reached this stage and are unable to pay the debt, you may need the creditor protection to stop a lawsuit provided by a bankruptcy or consumer proposal. This works for unsecured debt, but will not prevent secured creditors from enforcing their security rights.
Generally speaking, being taken to court only happens if you’re in a lot of debt, and you have income or assets available. If a creditor or collection agent wins a case in court and receives a default judgment order against you, then they can apply to:
- Garnishee your wages
- Freeze your bank account and demand any deposited amounts are directed to them
- Seize non-exempt property
- File a lien on your property, which will remain and must be settled before you sell
Types of property creditors can take away if you do not pay your debts
As already mentioned, the type of debt you have can affect what collection actions your creditors are allowed to take, and this is mainly concerning their rights on property seizure and re-sell.
When it comes to not paying your mortgage, the mortgage lender can take certain steps to collect from your property through an approved legal procedure of a power of sale or foreclosure.
In this circumstance, your creditor can force sale your home by either obtaining the right to sell it or taking complete ownership. Stopping a foreclosure requires you to bring your mortgage current either by refinancing with a second or new mortgage. You also need to be able to maintain all future payments. If you have a lot of unsecured debts like credit card debt, lines of credit or payday loans, you may want to consider filing a consumer proposal or bankruptcy to eliminate these debts to make your mortgage payments more affordable.
If you fail to make your car loan or lease payments, your vehicle financing company can take steps to repossess your vehicle. If they do, they will sell the vehicle and sue you for any shortfall. This shortfall can be eliminated through a bankruptcy or proposal.
Unsecured creditors do not have a direct claim on a debtor’s property. They can ask the court for an execution order, which allows the creditor to seize or place a lien on property not otherwise exempt under provincial exemptions.
An easier process is for a creditor to ask the court to issue a wage garnishment order. A wage garnishment will require your employer to withhold a portion of your wages until the debt is paid in full.
You can stop a wage garnishment by paying the debt or by filing a bankruptcy or proposal.
Freezing your bank account
Another option open to general creditors (credit card debts, lines of credit, financing loans, payday loans, for example) is to ask the court to seize funds in your bank account. Your creditor will then notify your bank to freeze your account and forward all money in the account (including future deposits) to them until the debt is paid off. All future deposits, including your paycheque, are available for seizure.
Right of Offset
In the special case that you owe money to the same bank that you have a deposit account, your bank can take money from your bank account any time without court approval. This is known as a bank’s right of offset.
Revenue Canada has a similar right in that if you owe money to the government (for taxes, student loans or EI overpayments, for example), the government can keep your tax refund to offset this debt.
Unsecured creditors can also ask the court to give them a Writ of Seizure or Writ of Execution against your car or another asset. All provinces have laws that provide a list of assets creditors cannot seize. These exemptions apply if you file bankruptcy, but limit general creditors as well. In Ontario, you have five days to claim your exemption if you don’t do so through a bankruptcy or consumer proposal.
Other common questions about creditor actions
Can a creditor force you to file bankruptcy?
Legally yes, but practically no. It is very rare for a creditor to petition an individual into personal bankruptcy. Creditors know they are likely to receive less in bankruptcy than if they continue to pursue other court actions. However, this does not stop collections agencies from threatening to petition you into involuntary bankruptcy to scare you into paying.
Can a collection agency take you to court?
If your creditor has entered into a contractual agreement with a collection agency to collect on your debt or has purchased your debt, the debt collector has the same rights as your original creditor to sue you in court.
How long can creditors or collection agencies pursue me?
Technically debts never go away. A delinquent account will fall off your credit report in six years, and creditors (or collection agencies) are subject to the limitation period to initiate a lawsuit. Still, they can and will continue to call to collect as long as they feel there is a financial benefit to them.
Where to find help if a creditor or collection agency pursues you
Ignoring your debts won’t make them go away, and here at Hoyes, Michalos & Associates, we can help.
If you can afford to pay back the debt, there are ways that it can be made easier by creating a budget, prioritizing certain payments or consolidating your debts into one loan, which you will pay off monthly.
You may need formal creditor protection, and this protection is provided through a Licensed Insolvency Trustee by either a consumer proposal or bankruptcy. Both options deliver a legal stay of proceedings, which stops further collection actions from happening.
Have you been threatened with legal action? Are you undergoing wage garnishment? Are you at a loss of what to do and who to turn to?
If so, contact us today at 1-866-747-0660 to review your debt relief options.