If you don’t pay your bank loan, credit card or other debt, the lender may decide to send your file to a collection agency. A collection agent’s job is to phone you and take whatever measures they decide are necessary to collect the money. They want to collect because that’s how the collection agency gets paid. But it’s not always in your best interest to pay a collection agency. How you decide to pay off your outstanding debt will affect how long it will remain on your credit report.
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Collection accounts and your credit report
If you have an account sent to a collection agency, your credit history has already taken a hit. Every month your creditor has been reporting missed or late payments to the credit bureau. Once the account goes to a debt collector, the debt is marked as a collection account.
Collection accounts significantly hurt your credit score and will do so for several years whether you pay them or not. According to Equifax, Canada’s largest credit reporting agency, a debt in collection won’t be removed from your credit report until six years after your last payment date.
The problem with making a payment to the collection agency is that this new payment will reset how long that account will stay on your report.
To explain, here is an example:
You have an outstanding credit card bill that you haven’t made a payment on in two years; based on credit reporting rules, it will automatically disappear from your credit report in four more years.
You have the money, so you decide to pay the debt collector. Since debt collectors report activity to the credit bureaus, doing so creates a new ‘last payment date.’ Once you pay the collection agency, the debt will remain on your credit report for six more years, two years longer than not making a payment. Even if the collection agency agrees to accept less than the full amount owing, it’s still on your credit report for six more years.
In other words, paying a collection agency can mean the debt will affect your credit score longer than not paying.
What happens if you don’t pay the collection agency?
You could simply not pay the debt.
As I explained earlier, if you haven’t made a payment in a long time, by not paying, the debt is purged from your credit report earlier than if you pay the collection agency.
Now I don’t necessarily recommend this course of action. While the account might fall off your credit report, collection agencies don’t give up. They will continue to call, and you need to weigh the risks of whether the collection agency can or will sue, take you to court and garnishee your wages.
First, will a collection agency sue you? If the debt is small, likely not. It costs money in legal fees to make an application to the court for a judgment (proving you owe the money) and getting a garnishment order.
Second, if the account is too old, the agency can’t sue you. All provinces in Canada have something called a statute of limitations. In Ontario, the limitation period is two years. If you have not made a payment in the last two years, debt collection calls will continue, but they can’t legally sue you to collect.
And that’s one more reason why you should never pay a collection agency. If you make a partial payment, the limitation period starts over, so now the collection agency or your creditor has two more years to sue you in court.
What alternatives are there to not paying a collection agency?
Consider a debt management plan
If you have the money to pay the debt and want to clear it up, you could talk with a not-for-profit credit counselling agency and arrange a debt management plan.
However, you must repay your debt in full, as this is a requirement with any payment plan through a credit counselling agency. A credit counsellor cannot settle your debt for less even if the collection agency is willing to accept less than the full amount.
A new note will be placed on your credit report when you enter into a debt management plan. This note will remain for two to three years from completion. However, some creditors continue to report your monthly payment made through a collection agency as regular transactions, refreshing the last activity date. So the debt can remain on your credit report for six years after you complete your debt management plan. Since a DMP can be anywhere from 1 year to 5 years, that one account could impact your credit history for a long time if you go through a credit counsellor.
Make a settlement offer
If you have a single old debt and want to stop the calls, consider negotiating a settlement with the collection agency. You can offer to pay the collection agency a percentage of what you owe and ask that the unpaid debt be written off. Depending on what you can afford and how old the debt is, start at 20 cents on the dollar and see what they are willing to accept.
Be aware that your settlement payment will update the last activity date meaning the debt will remain for another six years on your report. To avoid this, as part of your settlement arrangement, ask the collection agency to purge the debt from your credit report right away.
File a consumer proposal
If you have a lot of debt and don’t have enough money to pay all your debts in full, it may not be a good idea to settle directly with one collection agency. You may want to consider working with a Licensed Insolvency Trustee to negotiate a deal to eliminate all of your debts.
A consumer proposal wipes out all standard unsecured debts. Whether or not this is a viable option will depend on what other debt obligations you have, along with other factors such as your income and any assets you may own. However, if a consumer proposal is a viable option for you, you may be able to pay less than the full amount owing on all of your debts.
A consumer proposal is also reported on your credit report. This note is removed the earlier of six years from the date of filing or three years after completion. Since a consumer proposal provides a stay of proceedings, it prevents your creditors from recording payments and ‘refreshing’ the six-year purge period on your debts. This means each debt included in your proposal may be removed from your credit report sooner than with a debt management plan, and you save money by paying less than you owe.
It is important to deal with your debt. However there are times when you should not pay a collection agency:
- If you pay the collection agency directly, the debt is removed from your credit report in six years from the date of payment.
- If you don’t pay, it purges six years from the last activity date, but you may be at risk for wage garnishment.
- Through a not-for-profit credit counsellor, you can pay in full immediately, but the debt may not be removed until two to six years after you complete your DMP.
- If you qualify, you can file a consumer proposal, pay less than the full amount owing, and the debt will be removed from your credit report no later than 3 years after completion.
As you can see, it does not always make sense to pay a collection agency.
If you are struggling with debt and want to stop the collection calls, contact a Licensed Insolvency Trustee like Hoyes, Michalos. We will review your debts and budget during a free consultation and help you determine the best way to deal with your debt.