What are Collections and How Do They Work?
Collections happen when you are unable to keep up with your payments and/or have too many missed payments on a debt. The lender then contacts a collection agency to try to recover the unsecured debt from you. Essentially, a debt collection agency works on behalf of the lender to recover as much money as it can from you. They usually start contacting you through debt collection letters and then move on to phone calls.
Once a debt has been sent to collections, it will then be marked on your credit report. As soon as that debt ends up hitting your credit report, the damage has been done. While the debt still needs to be paid, whether you pay the debt collector or not, it will not affect your credit score any more than it already has.
Can a Collections Agency Sue You?
You might be surprised to learn this: Yes, a collection agency in Canada can sue you for an unpaid debt. That said, these types of lawsuits are rare and usually brought only for amounts above a certain threshold. You should keep in mind, though, that if they sue you and they win, you could be subject to:
- Wage garnishment
- Frozen bank accounts
- Court judgements and judgment enforcement
Because owing consumer debt is a civil matter in Canada, there won’t be any jail time or criminal records involved. That said, the debt will still need to be settled.
What is the Statute of Limitations on Debt?
When it comes to your rights and debt collectors’ rights, one thing to note is that there is a statute of limitations on debt in Canada. Once this period of time has passed, the debt then becomes time-barred debt, and they’re no longer able to take legal action against you.
The time limit begins on the date of your last payment or the date that you last acknowledged the debt in writing. How long the statute of limitations is depends on which province you live in.
| Statute of Limitations | Provinces |
| 2 Years | Alberta, BC, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Saskatchewan |
| 3 Years | Quebec |
| 6 Years | Manitoba, Northwest Territories, Nunavut, PEI, Yukon |
However, just like anything, there are some exceptions to this. Some debts that don’t adhere to these statutes of limitations are:
- Federal student loans
- CRA tax debts
- Mortgages
- Car loans
- Judgements
How Collections Can Impact a Mortgage Approval
One thing you should consider is mortgage approval with collections. Any unpaid debts on your report can indicate a history of non-repayment to lenders, making lenders less likely to approve a mortgage. Since late payments remain on your credit report for years, any of those can also show unreliability to lenders. In fact, any negative information can make it difficult to get a mortgage.
With any collection account on your report, a potential lender will see that your credit score is lower. However, unpaid collections with a past due balance are going to make it impossible to improve your credit score. If a settled or paid account is reported to the main credit bureaus, it’s going to be easier to drown out that negative history and get a mortgage.
Wage Garnishment and Collections
While wage garnishment can be used in collections, it can’t be used until legal action has been taken. This is not always done by the original lender, and can also be done by a debt collection agency. Here are the steps that are taken before wage garnishment occurs.
- Before garnishment can happen, creditors and debt collectors will try to collect the funds for 3 to 6 months. That said, when doing so, they have to follow provincial collection rules. This influences debt collector calls, collection call frequency, and what’s reported to Canada’s credit bureaus.
- Depending on where you live, there’s going to be a limit on when creditors can garnish wages. They’re only allowed to take a percentage of your income from each paycheque. The only exception to this is federal government debt through the CRA, where the limits will differ.
- If you’re self-employed, up to 100% of your income can be used to cover your collection debt.
If you’re looking to stop wage garnishment, then you’re going to have to use alternative debt relief solutions. You can do this by contacting a non-profit credit counselling agency and speaking to a licensed insolvency trustee. You can even contact a debt settlement company to help you create a payment plan and even erase some of your debt.
They can help with collection entries, private medical bills, credit card debt, and even small-claims court debt. They can make a settlement offer, saving you more money and allowing you to make affordable payments to catch up. The only downside is that our credit score will take a hit.
Can a Collection Agency Remove an Entry from Your Credit Report in Canada?
Yes, they can. If you are actively dealing with debt collectors, you can negotiate to have it removed from your credit reports as part of your debt settlement. Other than having the item in collections fall off on its own, this is the only way to get rid of it.
The Rights You Have Against a Debt Collector
When it comes to debt collectors in Canada, you actually have more rights than you think. They are governed by provincial consumer protection as well as Consumer Protection Canada. These guidelines are separate from harassment laws in Canada. They are also responsible for licensing collection agencies.
When it comes to your specific rights, let’s take a look:
Disputing Debts: If you don’t believe you owe the debt, you can dispute it in writing and ask to go to court. This is different from a credit report dispute for a credit reporting error.
Strict Contact Guidelines: In most provinces, collection agencies are prohibited from calling before 7 am, after 9 pm, and on Sundays and statutory holidays. There are also legal restrictions on how often they’re able to call you in a week.
Communicating in Writing: At any time, you’re able to send a registered letter and state that you want to be contacted in writing only.
Privacy Protection: The collector may only call your employer to verify your employment. They’re unable to disclose your debts to anyone.
How Long Does it take for Something to Come Off Your Credit Report After it is Paid Off?
That really depends on whether it’s a positive or negative tradeline. Each kind of credit file comes off based on how long it has been in your file. It has nothing to do with whether or not it is paid off.
Paying off a positive credit tradeline boosts your credit score, so leaving it on your credit report is actually good. Negative tradelines do not boost your credit score once you pay them off, but it is easier to build your credit once they are no longer on your report.
Does Paying Off Collections Remove It Faster?
Unfortunately, there’s no way to speed up your credit score recovery timeline, really. Even if you pay off your collections, they will fall off your credit report 6 to 7 years from the last activity. Until then, credit rating codes such as R7 and R9 will remain on your credit report.
That said, when it comes to debt negotiation in Canada, you can negotiate a pay-to-delete. This means that when you pay the debt, the collections will be deleted from your credit report. If the collector won’t agree to this, you can settle the debt with a new credit line by using products that offer a secured credit rebuild.
How Long Do Consumer Proposals Stay on Your Credit Report?
How long a consumer proposal stays on your credit report depends on a few different factors, but it’s mainly based on how long it takes you to pay it off. TransUnion removes it from your credit report either 3 years after all debts in the consumer proposal are paid off or 6 years after you sign it. Equifax takes it off your credit report 3 years after all of the debts in the consumer proposal are paid off.
What is a Consumer Proposal?
A consumer proposal is essentially an agreement set up by a licensed insolvency trustee. It basically states that the creditors allow you to pay a percentage of what you actually owe. The main reason that creditors would agree to a proposal is that if you filed for bankruptcy, then they wouldn’t receive anywhere near as much money.
How Do You Remove a Consumer Proposal from Your Credit Report?
Unfortunately, a consumer proposal only comes off your credit report after the allotted period of time from the credit bureaus. There is no way to have it come off sooner.
How Long Does it Take for Bankruptcy to Fall off Your Credit Report?
When it comes to bankruptcy, there are a few different scenarios that dictate how long it stays on your credit report. For the most part, both TransUnion and Equifax will take a bankruptcy off of your credit report 6 years after it has been completed. A bankruptcy will fall off your credit report after 7 years if you live in:
- Ontario
- New Brunswick
- Newfoundland and Labrador
- Prince Edward Island
- Quebec
More Than One Bankruptcy
The only exception to this is if you have filed for bankruptcy more than once. In that case, it will stay on your credit report for 14 years. In fact, if this happens, the first bankruptcy will reappear on your credit report and will stay there for 14 years.
What is Bankruptcy?
Bankruptcy is usually a last-resort process, but it is a legal process put in place when an individual or business is unable to repay debts to creditors. This allows an individual or business to obtain relief from some or all of their debt. While an individual or business can often file for bankruptcy, it can also be imposed by a court order. It is important to remember that any bankruptcy decisions should be made after talking to a credit counsellor. Bankruptcy may not be your only option.
In addition to being added to your credit report, it also has a significant overall impact on your credit score. It can be much more difficult to recover from than a consumer proposal or a collections account.
How Long Does a Judgment Stay on Your Credit Report?
A judgment is basically a debt that is from a lawsuit that you owe to the courts. If someone sues you and you end up losing the suit, that’s when a judgment could end up on your credit report.
The length of time that a judgment stays on your credit report is based on the province in which you live. It commonly stays on your credit report for a total of 6 years. There are some provinces where it stays on your credit report for 7 years. These are:
- New Brunswick
- Ontario
- Quebec
- Newfoundland and Labrador
How Do You Build Your Credit With Collections on Your Report?
While it may be more difficult to build your credit back up with collections and bad debt write-offs on file, that doesn’t mean it is impossible. The important thing to remember is that even if you have negative items on your credit report, all positive tradelines will slowly offset them.
It really depends on your individual credit situation, but there are a few ways to rebuild your credit.
- Pay your bills on time. While paying your bills on time doesn’t increase your credit score, it can decrease it if you have any late or missed payments.
- Lower your credit utilization. If most of your revolving credit lines are maxed out, leaving room on them can make a big difference in your credit score. This shows lenders’ financial responsibility.
- Get new credit tradelines. Any positive tradelines can really help to build up your credit score. Whether it’s a credit card or another type of credit, it all makes a difference.
- Get a secured credit card or loan. If you are unable to get approved for a new form of credit, this is a great way to rebuild trust with a lender and rebuild your credit score. Secured credit cards and loans are based on the fact that you give the lender money before you receive any. This demonstrates financial responsibility while building your credit score.
- Get credit counselling. Talking to a credit counsellor can help you find the right direction to build your credit score back up. There may be more options than you think to recover without ever having to consider a consumer proposal or bankruptcy.
Does Closing an Account Clear Its History?
Unfortunately, how long negative information stays on your credit report isn’t based on when the account is closed. It’s based on the last reported activity date on the account, and the time frame depends on the credit bureau that reported it. These discharge dates will allow the information to remain in place. Still, it can be overshadowed by orderly payments and a new positive credit history on your Canadian credit report, helping improve your financial future.
Disputing a Credit Report Error
A great way to keep track of your debts and check for errors is to get a free credit report from services like Credit Karma, Borrowell, or Clear Score. If you notice any errors, you can make a credit bureau complaint and start the dispute resolution process. Once a credit bureau investigation is completed with the credit reporting agencies, a credit file correction and negative mark removal will be processed.
To help catch any credit errors faster, you can sign up for a credit monitoring service. It will place a fraud alert on your credit file to help catch identity theft. You can also choose to do a temporary credit report freeze.
Once you’re notified of any changes to your financial information that can impact your financial situation, you can then dispute them or report fraud. Once it’s been deleted, it will help your credit issues and won’t impact your other debts. Recovering your credit score will allow you to get the best interest rates, since you won’t have any red flags for lenders. It’s a quick process from the date filed.
Can Spring Financial Help?
Yes, we definitely can. Not only do we offer personal loans to people with excellent credit scores, but we also report payments to the credit bureau, helping build up your credit. Our loans range from $500 to $35,000 and are open, meaning that there are no penalties for paying them off early.
If you are looking for an alternative way to build your credit and improve your credit history, we also offer a few different products designed for credit building. Both of these options are available on our website. You can also give us a call at 1-888-781-8439.
Whether you are looking to consolidate your debt, increase your credit score, or both, no matter the reason, we are here to help you!
