You can’t pay your credit card debt, you’ve evaded the nasty phone calls and shredded the threatening letters from your creditor. After a few months, there’s radio silence. You’re not off the hook, though. Before you know it, you’re receiving phone calls or notices in the mail from a new contact — your credit card debt has been handed off to a collections agency.
“For some people, it can be a very traumatic experience to receive a collections call, but consumers hold more cards than they realize,” says Mark Silverthorn, author of The Wolf at the Door: What to Do When Collections Agencies Come Calling. Silverthorn, a former lawyer, spent 12 years in the collections industry before jumping into representing consumers in their legal fights against the collections agencies.
“No one likes to be told that they’re not meeting their obligations,” says Scott Hannah, president of the national Credit Counselling Society. “It can be scary and intimidating if you don’t know your rights. But it’s important to understand that if you’re buried in debt, you shouldn’t avoid it.”
Here’s what happens when your debt is sold to a collections agency and what options you have moving ahead.
Why your credit is handed off to a third party
In the first three to six months of skipping your credit card payment, you might receive snail mail and phone calls from your issuer. You might even get computer-generated letters from a law firm urging you to settle your account.
“What happens is these notices start out nice, a reminder of your unpaid account,” Silverthorn says. “But then they become more insistent: ‘We want our money or your credit card will be cut off.'”
Once your account is six months delinquent, your issuer can choose from a handful of options to get its money:
- Keep trying on its own: Major banks may be persistent with phone calls and letters for months.
- Farm out debt to a collections agency: Some creditors may recruit a third party company to recover the money on a commission basis. Files are grouped together and if the agency doesn’t collect any debt, it gets zero compensation. The files are then recalled and sent to another agency or for another length of time, typically six to nine months but possibly as little as 30 days.
This is the most common reason why credit is handed off to a third party, Silverthorn says. - Sell the debt to a collections agency: This is a rarity and typically occurs only after the debtor has defaulted for more than three years and the issuer has exhausted all other measures.
Canadian banks sell less than 5 per cent of their clients’ debt, Silverthorn says. This is because once a bank sells its debt, it has no control over how the purchaser handles the collections process. Ultimately, creditors don’t want their clients — even those who don’t pay up — dealing with shoddy and aggressive collections agencies. - Sue the consumer: While this is another anomaly, in some instances creditors will cherry-pick cases that are worth resolving in court. Creditors might even sue you in higher court, forcing you to hire a lawyer to defend your case. Creditors hope this will force you into a default judgment. Collections agencies in Canada sue fewer than one in 10,000 accounts.
“Odds are good that while your debt is with a collections agency, you won’t be sued,” Schwartz says.
Since collections agencies are paid on commission and work under a months-long timeframe, it may be too expensive and time-consuming for the agency to pursue the debt. Silverthorn says the legal process is lengthy, thanks to paperwork, wait times and notices to appear in court, among other things, and if the agency doesn’t get any money back, it won’t get paid, either, so agencies generally prefer not to go this route.
What happens to your credit, debt
Practically speaking, your experience shouldn’t change as another company contacts you for payment. But your credit score is taking a beating — once your account goes past the six-month mark in default, you’ve hit an R9 rating and it can’t get worse.
An unpaid account will show up on your report for up to seven years from the date of your last payment, stifling your chances of getting a loan, securing a mortgage and other financial milestones, so think twice before turning your back on outstanding debt.
You decide your debt’s fate though, the experts say.
“The consumer actually has a significant amount of power in determining when — if ever — and how much the creditor is going to get at this point,” says Silverthorn. “When a consumer doesn’t make a minimum monthly payment, they’ve essentially gone on strike.”
As your debt gets older, your creditor may be more willing to accept a one-time lump sum payment for less than the current outstanding balance. The collections agency, acting as the middleman, may be instructed to accept 90 cents for every dollar of debt you owe, for example. You can even push for another settlement, but the counter offer has to get the green light from the bank.
Hannah recaps the statute of limitations: once the limitation expires in your province or territory, your creditor can’t sue you to pay up. In B.C., Alberta, Saskatchewan, Ontario and New Brunswick, it’s two years.
Credit counselling agencies can also act as mediators, Hannah says, and can even help to negotiate reduced interest rates and other concessions to help both parties involved.
“We’ll make a proposal to the collections agency or the creditor trying to come to an arrangement so consumers can get to a payment plan that’s realistic,” he says.
