Why You Should Never Pay a Collection Agency

Posted on April 10, 2024 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee

If you have dealt with overdue bills, whether a credit card, bank loan or other debt, you may have been contacted by a collection agency demanding payment. Many lenders send overdue accounts to these agencies or sell the account for pennies on the dollar to recover at least part of the money owed. The collection agency then will contact you by phone, email or even in person, or take legal action to get the money from you as that is how they get paid.

But while your first instinct may be to pay the agency what they are asking for, it might not be in your best interest to do so. This article will explain why you should never pay a credit collection agency.

Collection Accounts on Credit Reports

Worrying about the consequences of not paying a collection agency on your credit report is natural. However, if your account has reached the point of being sent to an agency, it is already impacting your credit report. Your creditor will report every late or missed payment to the two Canadian credit bureaus, Equifax and TransUnion.

While collections will harm your credit score, they will do so regardless of whether you pay the collection agency. Debts sent to collection will be removed from your credit report six years after your last payment. So, paying the collection agency will delay that point as it will reset the clock, keeping the collection on your account longer.

Even if the collection agency settles with you for less than the entire amount owing, it will count as a payment, and the six-year period will restart.

Reasons to NOT Pay a Collection Agency

As mentioned above, your credit report is already negatively impacted by the time your account is sent to a collection agency. 

Once the collection agency has your account, it will contact you in every way possible, by phone, email, letters or in person, to collect the money as this is the only way they can recover it. They also have the option to take legal action and sue you to get a wage garnishment, so it is a risk you have to weigh carefully.

Now, you may ask yourself how likely the collection agency will sue you. If your debt is relatively small, it is not expected because applying to the court for a judgment and getting a garnishment order costs money, so it might not be worth the effort to sue you.

Also, if your account is too old, they actually can’t sue you. Every Canadian province has a statute of limitations: two years in Ontario. This means that if you have not made a payment in the past two years, the collection agency can still call and contact you demanding the money, but they can’t legally sue you to recover the money.

Any payment, even a minimum or partial payment, will restart the limitation period, and your creditor or collection agency have two additional years to sue you.

What are the alternatives of paying a Collection Agency

Alternatives to Paying a Collection Agency

A few options are available if you don’t want to or can’t pay the collection agency.

Make a settlement offer

If you have only one old debt and want to stop the harassing calls, you could negotiate a settlement with the collection agency by offering a percentage of what you owe and asking for the unpaid debt to be written off. The agency will often contact you with a settlement offer, but you can also offer a settlement, depending on how old the debt is and how much you can afford. You can start at 20 cents on the dollar and see where it leads.

However, it is critical to remember that any payment will update the last activity date and reset the six-year period the debt will remain on your credit report. You could avoid this by asking the collection agency to immediately purge the debt from your report as part of the settlement arrangement.

Debt Management Plan

If you want to pay off the entire debt, you can enter a Debt Management Plan through a credit counselling agency, which can help you spread the total amount over a longer period. 

Like with a settlement offer, every payment you make to the creditor or collection agency will reset the six years the debt will remain on your account. You cannot accept or negotiate settlements under a DMP but must repay the total amount.

File a Consumer Proposal

If you have unmanageable debt or several accounts that have fallen behind and don’t have enough money to pay off all debts in full, consider contacting a Licensed Insolvency Trustee to file a consumer proposal.

A consumer proposal is a legally binding contract that can reduce your overall debt by up to 80%, with the remaining debt discharged (written off). 

A consumer proposal will also be reported to your credit report and remain on it for six years from the filing date or three years after completion, depending on which occurs sooner. However, a consumer proposal provides a stay of proceedings, meaning creditors cannot report payments and reset the six-year period. So, it may be removed from your credit report sooner, and you will have to pay less than you owe.

Expert Advice from a Licensed Insolvency Trustee

If you are struggling with overdue accounts and have been harassed by collection agencies, a consumer proposal might be the right debt relief option. Speak to a Licensed Insolvency Trustee today to find out.

The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well-informed and don’t rush into any solutions. All of our consultations are free, without time limits.

Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.

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Mihir Chande
Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee Mike, a Chartered Accountant, began his insolvency career in the Corporate Insolvency and Restructuring group at one of Canada’s largest insolvency firms. After gaining extensive experience, he founded Chande Debt Solutions to offer personalized and empathetic debt relief services to clients seeking an alternative to traditional solutions.

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