When you fall behind on credit card payments, and debts continue to accumulate, it’s easy to feel overwhelmed by calls and letters from collection agencies. However, understanding how the debt collection process works, how to communicate with collectors and reviewing your options can make deciding how to proceed much less stressful.

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How Does Credit Card Debt Collection Work?

Credit card companies don’t really want you to pay your balance in full. If you carry a balance, they earn more in interest. However, it’s a balancing act to ensure that borrowers don’t fall so far behind that the credit card issuer won’t recover the debt owing. Once you miss a payment or two, your credit card company will begin a process to collect on delinquent payments.

Missed Payments and Account Delinquency

When you miss a credit card payment, your account becomes delinquent. You’ll be charged late fees, and your interest rate may increase to a penalty rate, typically between 25-30%. Your credit score will begin to drop after 30 days of missed payments, with more severe impacts if payments remain missed at 60 and 90 days.

Internal Collection Efforts

After 30 days of missed payments, your credit card company’s internal collection department takes over. They’ll increase contact attempts through phone calls and letters. During this stage, your credit card company may still be willing to work out a payment plan or hardship program.

Assignment to Collection Agency

Around 90-180 days after missing payments, your credit card company typically assigns your account to a third-party collection agency. The original creditor still owns the debt but pays the agency a percentage of any money collected. Your account is now considered “charged off,” though you still owe the debt. On your credit report, these accounts will appear as “in collection” with an R9 rating – the most severe negative rating possible, indicating serious delinquency.

Debt Sale to Debt Buyers

If the collection agency is unsuccessful, your credit card company may sell your debt to a debt buyer for a fraction of what you owe. The debt buyer now owns the debt and has the right to collect the full amount. This usually happens after 180+ days of delinquency but can also happen to debts that are several years outstanding.

Collection Agency Contact

Debt collectors initially reach out through letters and phone calls to connect with borrowers who have fallen behind on payments, attempting to secure repayment, and when these direct contact methods prove unsuccessful, they may employ skip tracing techniques like specialized software and private investigators to locate debtors.

Negotiation Period

Collection agencies often have the authority to negotiate settlements for less than the full amount owed. They may accept lump-sum payments of 50-70% of the debt or arrange payment plans. However, they typically prefer faster resolutions and may be less flexible with long-term payment arrangements.

Legal Action and Enforcement

If unable to collect through normal means, collection agencies may pursue legal action by filing a Statement of Claim against you in court. You’ll have a limited time (usually 20 days) to file a defense. If you don’t respond or if you lose the case, the court will issue a judgment against you. With this judgment, collection agencies can pursue various enforcement actions:

Garnish up to 20% of your wages directly from your employer
Seize money from your bank account
Place liens against your property
Force the sale of assets in some cases

How to Handle Collection Calls

While collection calls can be stressful, maintaining professional communication helps protect your rights and can lead to better outcomes. Collection agencies must follow specific rules about when and how they contact you. They cannot call on statutory holidays or Sundays, before 7 am or after 9 pm, or use threatening language. They’re also not allowed to discuss your debt with family members or your employer beyond verifying employment. If you need time to review your options, you can request that they communicate with you in writing only.

When dealing with collectors:

keep your communication clear and professional
take notes during every call, including the date, time, and who you spoke with
be honest about your financial situation
don’t share sensitive information like banking details or your Social Insurance Number.

Remember that anything you say to a collector can affect your situation. If you’re receiving calls about multiple debts or feel overwhelmed by collector communication, it’s often wise to seek professional advice from a Licensed Insolvency Trustee before making any payment arrangements.

Should You Pay or Ignore Your Credit Card Debt?

Ignoring your credit card debt won’t make it go away, however that does not mean your only option is to pay to make the calls stop. Before deciding whether to pay the debt collector or not, there are several financial factors you should consider:

Check the Limitation Period

Collection agencies cannot take legal action to recover a debt after the limitation period has expired. In Ontario, that period is two years from your last payment or written acknowledgment.

Before making any payments, carefully check your records for the date of your last payment. Any new payment or even a written acknowledgment of the debt will restart this two-year clock.

Collection agencies often become more aggressive as this deadline approaches, but they may also offer better settlement terms. If your debt is approaching the limitation period, first determine if you can afford a repayment plan. If you can, consider making a settlement offer. If you cannot afford payments, don’t acknowledge the debt until you’ve consulted a professional like a Licensed Insolvency Trustee about your options.

What Is the Impact on Your Credit Rating

Credit card collections are treated the same as any other type of collection account on your credit report – they’re not better or worse than unpaid phone bills, utilities, or other debt. Accounts in collection appear as an R9 on your credit report. This is the same rating as a bankruptcy. Collection accounts remain on your credit report for 6 years from the date of last activity,

While paying a collection account can help your credit score long-term, the immediate impact may be minimal. Even after payment, the collection entry stays on your report – it’s just marked as “paid.” In Canada, it’s illegal for collection agencies to offer “pay for removal” deals where they promise to remove the collection entry from your credit report in exchange for payment. However, unpaid credit card debt can make it significantly harder to rebuild credit or obtain new credit in the future. Some lenders won’t consider your application at all with unresolved collections on your record.

How Much Can You Afford?

Before agreeing to any payment arrangement, take an honest look at your monthly budget. You don’t want to harm your financial situation further by agreeing to payments you can’t maintain or by using money needed for essential expenses. If you have multiple debts, make sure any payment arrangement leaves you enough to address your other obligations. Never agree to payments that would leave you unable to cover basic needs – this often leads to taking on new debt to cover old debt, creating a dangerous cycle.

Remember that making payments resets any statute of limitations period for the debt collector.

Should I Make a Settlement Offer?

Collection agencies regularly purchase defaulted credit card debt from banks for a fraction of what you owe. While recent credit card debt (less than a year old) typically sells for up to 25 cents on the dollar, older debts sell for much less. This affects what settlement they might accept. For recent debts, agencies typically expect 50-70% of the balance. As debts age, this percentage often decreases, especially if the limitation period has expired. The older the debt, the less you should offer to settle.

If you’re considering a settlement, get any offer in writing before sending money, and make sure it includes a complete release of debt. Never provide banking information over the phone, and keep proof of all payments made.

If you’re dealing with multiple debts or can’t afford to pay, consider speaking with a Licensed Insolvency Trustee about debt relief options that can protect you from collections while providing an affordable way to deal with your debts.

Professional Debt Solutions

If you can’t settle with the collection agency, there are several professional credit card debt relief options that can help you get back on track, each offering different advantages depending on your financial situation.

Credit Counselling

Credit counselling agencies can negotiate lower interest rates with credit card companies and set up debt management plans. However, they cannot reduce the principal amount you owe, and not all collection agencies will participate in these programs. You’ll still need to repay 100% of your debt plus fees, usually over 3-5 years.

Credit counseling can be a good option if you have steady income and can afford to repay your credit card debt but need budgeting support or like the option of consolidating other debts into one payment.

Consumer Proposal

A consumer proposal may be worth considering if you can’t repay your credit card debt in full, especially if your total credit card and other unsecured debts exceed $5,000, as it allows you to legally settle your debts for less than you owe while protecting you from collection actions.

A consumer proposal is a legal agreement between you and your creditors, filed through a Licensed Insolvency Trustee. We review your income, expenses, and assets to determine what you can reasonably afford to pay, then make an offer to your creditors to settle your debts. For example, if you owe $50,000, you might offer to pay $20,000 through monthly payments of $350 over 5 years.

Your creditors, including collection agencies, vote on the proposal. If the majority accept it, all are bound by the terms. This means:

All collection calls and legal actions must stop
Your debts are reduced by up to 80%
Interest charges stop completely
You make one affordable monthly payment
You keep your assets
You get debt relief without bankruptcy

Bankruptcy

Bankruptcy is a legal process that gives you a fresh start when you can’t reasonably pay your debts. When you file bankruptcy, you work with a Licensed Insolvency Trustee who can help you decide if bankruptcy is the right option for your situation. You may need to surrender some assets (though many are exempt under provincial law) and make monthly payments based on your income. The process provides immediate protection from collectors and eliminates most unsecured debts completely. Most first-time bankruptcies can be completed in as little as 9 months.

Each of these options has different implications for your credit rating, assets, and future financial. However, struggling with collection calls and mounting credit card debt is likely already harming your credit score and these debts won’t go away on their own. If you need advice on how to handle credit card debt in collection, contact Hoyes Michalos today for a free consultation to review all your options. We’ll help you understand what each solution would mean for your specific situation and create a plan that works for you.

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What To Do About Credit Card Debt in Collections