Collection agencies are hired to recover unpaid debts. They may contact you through phone calls, letters, emails, or other methods in an attempt to collect payment.
When this happens, many people’s first instinct is to pay the collection agency immediately just to stop the calls. Paying a collection agency, however, is not always the best move – and in some situations it can actually make your financial situation worse. Before making a payment, it’s important to understand how collections work in Canada and what your options are.
How do collections affect your credit report in Canada?
By the time a debt is sent to collections, the damage to your credit score has usually already occurred.
Late or missed payments are reported to Canada’s two main credit bureaus:
- Equifax
- TransUnion
These missed payments can lower your credit score and remain on your credit report for several years.
Once an account is sent to collections:
- a collection account appears on your credit report
- the negative payment history remains
- your credit score may drop further
Collection accounts can make it harder to:
- qualify for loans
- obtain a mortgage
- rent an apartment
- finance a vehicle
This damage happens whether you pay the collection agency or not.
Do collections disappear after 6 years in Canada?
In most cases, a collection account will remain on your credit report for six years from the date of last activity or last payment. After this period, the collection account typically drops off your credit report automatically.
However, there are two important things to understand:
- The debt itself may still legally exist even after it disappears from your credit report.
- Making a payment may reset the last activity date, which can extend how long the collection remains on your credit report.
Because of this, many people choose to review their situation carefully before making a payment to a collection agency.
Why paying a collection agency doesn’t always help
Many people believe paying a collection agency will immediately improve their credit score.
In reality, this is usually not the case.
Even if you pay the debt in full:
- the collection entry may remain on your credit report
- the record of missed payments still exists
- the damage to your credit score may remain for years
In some cases, making a payment can even extend how long the collection account appears on your credit report.
This is one of the main reasons why it’s important to fully understand your situation before making a payment.
Paying a collection agency can restart the statute of limitations
Another important factor to understand is the statute of limitations on debt. In many Canadian provinces, creditors only have a limited amount of time to pursue legal action for unsecured debts.
In Ontario, for example, the limitation period is typically two years from the last payment or acknowledgment of the debt. If you make a payment to the collection agency, that limitation period may restart.
This means the creditor could once again have the legal right to pursue collection through the courts.
What happens if you don’t pay a collection agency?
If you choose not to pay a collection agency, several things may happen depending on the debt and your situation.
Continued collection calls
Collection agencies may continue calling or sending letters in an attempt to collect the debt.
Possible legal action
For larger debts, creditors may pursue legal action that could lead to:
- wage garnishment
- frozen bank accounts
- court judgments
For smaller debts, however, legal action is often unlikely due to the cost involved.
The debt may become legally unenforceable
If the statute of limitations expires, creditors may still attempt to collect the debt, but they may no longer be able to successfully sue you.
Because these rules vary by province, it’s important to confirm the timeline where you live.
When it might make sense not to pay a collection agency
There are situations where paying a collection agency may not be the best option.
For example:
- the debt is very old
- the statute of limitations has expired
- the collection agency cannot prove the debt belongs to you
- you plan to settle the debt for less
- you have no income or assets creditors could collect
Before ignoring collection calls, it is important to confirm your legal situation with a professional like a Licensed Insolvency Trustee.
When paying the debt might make sense
There are also cases where resolving the debt could be the best option.
For example:
- you want to avoid possible legal action
- you have the financial ability to settle the debt
- you want to resolve the issue quickly
- you are preparing to apply for a mortgage or financing
In some cases, it may be possible to negotiate a settlement for less than the full balance owed.
Alternatives to paying a collection agency
If you cannot afford to repay your debts, there are other options that may help resolve collection issues.
Negotiating a settlement
You may be able to negotiate a reduced lump-sum payment.
Debt management plan
A credit counsellor can help arrange structured payments over time.
Consumer proposal
A consumer proposal is a legal process that can:
- reduce unsecured debts by up to 80%
- stop collection calls
- stop wage garnishments
- consolidate debts into one monthly payment
Once a consumer proposal is filed, a stay of proceedings legally stops creditors and collection agencies from contacting you.
Bankruptcy
Bankruptcy may eliminate most unsecured debts and immediately stop collection activity.
What should you do if a collection agency contacts you?
If a collection agency reaches out to you, consider taking these steps before making any payments:
- Confirm the debt actually belongs to you
- Request written proof of the debt
- Check the date of last payment
- Determine whether the statute of limitations has expired
- Speak with a Licensed Insolvency Trustee about your options
Making a quick payment without understanding the situation can sometimes create bigger problems later.
Struggling with collection calls?
Collection calls can be stressful, especially if you’re unsure what your rights are or what options you have.
Spergel’s Licensed Insolvency Trustees can review your situation and help you understand whether a settlement, consumer proposal, or another debt solution may be the best path forward.
Consultations are free, confidential, and judgment-free – book yours now.
What to read next
- What happens if you don’t pay your debts in Canada?
- Does owing taxes affect your credit score?
- Consumer proposal vs bankruptcy: what’s the difference?
- How to stop collection calls in Canada
