Debt Relief Experts
When you have unpaid credit card debt, you might try to ignore the incoming bills. You are also likely stressed over the impact on your credit rating and your ability to keep paying for living costs like groceries and personal needs since you may be using credit to pay for those expenses.
You can tell your credit card provider, “sorry, I don’t have any money to pay my bill,” but if you are unable or refuse to pay, that does have consequences – both short-term and long-term. In this blog, I’ll explain the consequences of unpaid debt. In addition, I’ll propose some options to consider when you can’t repay credit card debt.
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What happens if you can’t pay your credit card debt in Canada?
The reality is creditors expect regular recurring payments and will pursue all options to collect when you are unable to pay when you owe money. Ignoring the bills means you risk phone calls from a debt collector, lowering your credit score, and other potential impacts.
Beyond the stress of knowing you owe money, the consequences of unpaid credit card debts, vary depends on the situation and the credit card issuer. I am Scott Schaefer, a Trustee with Hoyes Michalos and Associates. Some of the possible outcomes are you will be charged a late payment fee, you’ll be charged interest, you could have details reported on your credit report of the late payment. The longer it remains outstanding, the more significant hit it will be on your credit report and the worse your score can become. Your interest rates could get increased.
But here are some of the more extreme outcomes: you will have debt collectors calling you; the account could be written off your credit report which really significantly reduces your score. There could be court action. You could have your wages garnished or your bank account seized. But keep in mind that these circumstances are usually done over time. Time makes a difference. So the longer things are, the worse it will be. Late payments can be reported on your credit report for up to six years.
If you don’t need new credit, you might be able to wait it out but the debt does not go away and you may not be able to tolerate that low credit score. So if you’re looking at dealing with your debts, there’s four different solutions. You could try to work a payment plan out with the credit card provider. Ask them to reduce the interest rates; ask for a reduction in the late fees to make it more manageable for you. But if the debt’s old, that may not be viable for you, you might want to try to do a debt settlement of that credit card where you try to work out a deal on it. But make sure if you are working a deal, you get that deal in writing first. Then, if there’s late payments on these credit cards and you’ve got other debts you’re having trouble with, you might want to try one of the legal solutions, one of the government solutions, which is a consumer proposal or bankruptcy. A consumer proposal is where you can legally settle your debts together in one monthly payment. If you want to learn more, visit us at Hoyes dot com.
Many people struggle with credit card bills but somehow manage to make their minimum monthly payments. They won’t get out of debt that way, but they are not risking further legal action as long as they maintain the minimum payment. But when you stop paying your credit card bills, or carry your balance over your allowed limit, then you are in default. What happens then?
Default occurs when you are unable to fulfill an obligation on a loan, and in the case of a credit card, that means you are not making the minimum monthly payment.
If you are unable or refuse to make payments and the debt hasn’t been paid according to the terms of your cardholder agreement, the consequences can include:
- Late payment fees
- Damage to your credit rating
- Higher interest rates
- Collection calls
- Cancellation of your credit card
- Loss of rewards points
- Lawsuits
- Wage garnishment
- Seizure of your bank account
The longer the outstanding debts remain unpaid, the more severe the actions your creditor will take to collect.
Accounts in collection
If you miss a payment or two, you can expect a politely worded letter or email from your credit card provider reminding you to make a payment. The hit to your credit score from a single missed payment will likely be temporary, assuming you catch up and have no other payment issues.
However, if you are several payments behind, your credit card company will likely send your account to a third party debt collector. Every issuer has different internal debt collection periods, but you can expect a collection agency to become involved when you are beyond 90 to 120 days late.
If your debt is large enough, your account may also be turned over to a lawyer for collection.
If you do not pay your bill, you can eventually expect more aggressive techniques to collect on the unpaid account.
Seizing money from your bank account
Most major financial institutions in Canada have the concept of a right of offset written into their credit card agreements. That means they can use money that you’ve deposited with them in a bank account to pay off an outstanding debt you might owe. This only applies if the credit card debt is owed to the same institution where you bank.
For example, let’s say you have a TD Bank Visa and you have a chequing account at TD. In this case, TD can legally seize money from your bank account, up to the full amount owing on your credit card, including interest and penalties.
They can do so without:
- Getting your consent
- First letting you know
- Leaving money in your account if the amount owed is greater or equal to the money in your account.
However, Capital One MasterCard can’t automatically seize money from your TD bank account. To do so, Capital One would need a court order.
Lawsuits and legal action
Credit card companies can sue you to collect on outstanding charges. However, lawsuits are expensive and time-consuming, so suing for non-payment is only likely to happen if you owe several thousands of dollars. In addition, the relevant statute of limitation period on the debt must not have expired. The debt does not go away, but the threat of a lawsuit is off the table, no matter what the collection agency says.
If you are being sued for credit card debt, you will receive a Statement of Claim. Suppose you ignore this notice or lose in court. In that case, your credit card provider may be granted a Judgment Order confirming that you owe the debt. This order gives the credit card company, or their collection agent, the ability to pursue harsher means to collect money like garnishing your wages or freezing your bank account.
Garnishment orders
Once they have a legal court order, any credit card company can get a garnishment order. They can ask your bank to seize money from your bank accounts and direct those monies to them for payment. With a wage garnishment, a portion of your pay is deducted until the debt is paid in full. The only way to stop a wage garnishment or unfreeze a bank account is to pay the debt or file a consumer proposal or file a bankruptcy.
What happens when your credit card company sends the debt to a collection agency?
Most companies will pursue collection using their in-house collection department for a few months. However, after several months they will write off your account as uncollectible and hire a collection agency to pursue payment. The collection agency may get paid a commission or may buy the debt for pennies on the dollar.
Before a debt collector can contact you, they must send a private letter by mail or email outlining how much you owe, who the original creditor was, and the name and contact information of the collection agency and collector demanding payment.
Once this letter is sent, you can expect calls to begin.
Debt collectors often use aggressive tactics to get you to honour your payments, like calling you repeatedly, contacting your relatives, and calling at inconvenient hours.
It is important to know your rights and understand what a collection agency can and can’t do. For example:
- Collection agents can’t call past 9PM on weekdays or 5PM on weekends and on statutory holidays.
- In Ontario, once you speak with a collection agent, they can only contact you up to 3 times a week to request payment.
- Collection agents can call your employer or family but only to confirm your contact information, or in the case of your employer, to enforce a wage garnishment.
- Collection agents can sue you for outstanding credit card debts but are unlikely to do so for small debts.
- Collection agents can usually accept settlement arrangements (but always get any agreement in writing before you pay).
Unless you have committed fraud, you can’t be sent to jail for unpaid credit card debt.
Always ensure you are talking with a legitimate collection agency which is why you should request written documentation before providing any personal financial information, negotiating any terms, or making any payments.
Once your account is sent to collection, this information is reported to the credit bureau. Accounts marked as ‘in collection’ have a very negative impact on your credit score and this notification will remain for 6 years.
How long can a debt collector chase you for old credit card bills?
The statute of limitations for debts in Canada varies by province, from 2 years to a maximum of 6 years. For example, in Ontario, this means that you cannot be sued in the courts for an unpaid unsecured debt 2 years after the date of last activity, which is usually your last payment date or last date you charged something on your card.
It’s important to understand that a debt collector can continue to call to collect on an old debt, even one that has been removed from your credit report. While they can no longer pursue you in the Canadian courts, they can continue to demand payment as the debt never goes away unless it is paid, or you file a bankruptcy or consumer proposal.
What happens to your debts after you leave the country?
If you have lived or worked in Canada and applied for credit here, you may owe money on your credit cards. What happens if you leave Canada without paying your credit card debt?
First, unpaid debt owing to a Canadian company is reported to the Canadian credit bureaus only. For example, missed payments on your Canadian cards are not reported to US credit reporting agencies.
Second, the debt will remain owing and could cause problems if you have assets in Canada or if you intend to return in the future.
If you own property or have a bank account in Canada, your creditor can still sue you if the limitation period has not expired, however, they are only likely to do so if the debt is large. If you are not available to defend the lawsuit, a Canadian judge may render a verdict in favour of the credit card company which can lead to a court order to seize any property you have in Canada and maintain their right to pursue you for the debt if you return to Canada.
Credit card companies rarely pursue debtors in other countries, as this involves foreign courts and engaging lawyers who can act in those countries, however, it can happen if the amount you owe is significant.
If you are planning on returning to Canada, unpaid debts can impact your ability to gain new credit when you return. Filing a bankruptcy while living abroad can be done but has extra consideration.
How does unpaid credit card debt affect your credit score?
There is no doubt that late payments are very harmful to your credit rating. While Equifax and TransUnion have different calculations, payment history makes up 35% of your overall credit score. How much late or missed payments impact your credit score depends on several factors, including:
- How large the payment or outstanding debt is
- How long the payment is overdue
- How many late payments you have
- What your current credit score is
If you have a credit score over 800, one late payment can drop your score 30 points or more. If you have a low credit score, an additional late payment will have a smaller impact but it will take you a very long time to recover from a recurring credit history of missed payments and accounts in collection.
If your payment is less than 30 days late
If your payment is less than a month late, there’s no reason to panic. You will be charged interest and a late fee by your credit card issuer, but your credit score should not be affected. Most companies do not report missed payments to the credit bureau until they are 30 days late.
If your payment is more than 30 days late
At 30 days late, your credit card issuer will report your missed payment to the major credit bureaus. Consequently, your creditor will add a note to your credit report indicating your payment is late. This note may have the number code R2, meaning you have a revolving line (credit card) that is 1 month late, or it may simply say 30 days past due. Negative information like a late payment will remain on your credit report for up to 6 years.
If your payment is more than 4 months late
As you continue to miss credit card payments, these will be added to your credit report. Your account will be marked as R3 for 2 months late, R4 for 3 months late etc., up to R5.
Your creditor has the right to close your account, which means you no longer have access to this credit card to make purchases. Closed accounts on your report will also increase your utilization rate, which will lower your credit score.
If you miss a payment by more than 120 days, your creditor may label your account as a charge-off. A charge-off means your creditor has written off the account as a bad debt. At this time, your account will be marked as an R9. Accounts in collection or in charge-off severely harm your score and are an indication to future lenders that you may not be a good credit risk.
If you have accounts this far in arrears, you may find it difficult to obtain new credit.
At this stage, your creditor may also transfer or sell the debt to a collection agency.
If you make several late payments
Credit scores are a mathematical calculation based on the amount and mix of credit you carry and how you maintain payments. So, it’s not surprising that the more late payments you make on more accounts, the worse your credit score will be.
However, the real issue is that if you are behind on your credit card payments, you are experiencing severe debt problems. The consequences go beyond your credit score. Eventually, your credit will be cancelled, and you will find it difficult to borrow from anyone other than perhaps payday lenders. Getting a payday loan will only worsen your financial problems.
If you can’t pay your credit card debts, it may be best to consider other options to eliminate your credit card debt.
Options to consider if you can’t pay credit card debt
According to the Canadian Bankers Association, 30% of Canadians carry balances on their credit cards from month to month. If you are significantly behind on your payments and can’t afford to pay off credit card debt on your own, you still have options.
It’s entirely possible to do nothing, and there are times when you can ignore the calls and not make any payments. Consider waiting it out if:
- you are creditor proof which means you have no assets to be seized and no wages that can be garnished
- the debt is beyond the limitations period barring lawsuits
- you don’t care about your credit score, or the debt is close to the time during which it will fall off your credit report (6 years from your date of last activity)
While you can consider a consolidation loan to consolidate credit cards into a new lower-interest loan, avoid high-interest consolidation loans, which often carry a higher rate than your credit cards, even though the monthly payments might be lower.
OK, now that we know what strategies to avoid, here are some options to consider when you fall behind on your card payments.
Make repayment arrangements
Depending on your financial health, you can negotiate payment terms with your credit card company or their debt collector. In addition to arranging monthly payments, ask for a reduced interest rate and waiver of penalties on overdue accounts to help make repayment easier.
This option is only likely to work if you are only a few months behind and have sufficient income to repay your debts in full. Before making any payments, get all agreements in writing. Understand the statute of limitations for your province, which prohibits anyone from suing you to collect. Knowing your debt is too old to sue to collect may give you some bargaining power.
Negotiate a debt settlement
If the debt is old and outside the limitations period, offer a settlement amount. Depending on the amount and how old, a good place to start is 20 cents on the dollar.
Three things to consider before making a debt settlement offer:
- Make sure you can afford the offer. It’s essential to complete these payments. Otherwise, you will find yourself facing the entire debt again.
- Be aware that making a settlement payment will update the last payment date resetting the clock for both the limitation period and the 6-year period before the account is removed from your credit report.
- Make sure that all your debts that need to be settled are settled, as only dealing with one or a few of them might only be a band aid solution.
Ultimately, you may need help from experts to clear your credit card debt.
Repay through a debt management plan (DMP)
A DMP is a repayment arrangement through a credit counselling agency. The credit counsellor may be able to stop or reduce the future interest charges, which means your balances won’t continue to grow. However, you must commit to repay the entire balance owing at the time you sign up. A credit counsellor cannot negotiate a debt settlement for you.
If you need help making a settlement offer, consider talking with a Licensed Insolvency Trustee.
Consider a consumer proposal
If you struggle to repay a lot of credit card debt or have other unsecured debt, a consumer proposal can provide needed debt relief.
Governed under the Bankruptcy & Insolvency Act, a consumer proposal provides several benefits:
- A consumer proposal stops various forms of creditor actions, including collection calls and wage garnishments.
- It allows you to repay back less than the amount you owe.
- In addition to eliminating your credit card debt, it can help you deal with monies owed to other creditors, including CRA, payday loans and certain student loans.
- Most proposals are completed in 3 to 5 years (maximum). Lump sum settlements are also possible.
- It gives you the power to negotiate payment terms you can afford.
- A consumer proposal is binding on all creditors.
Lastly, consider filing bankruptcy
If you can’t make a viable consumer proposal and you are not creditor-proof, bankruptcy may be an option.
Need help choosing between these debt relief options? Give us a call to book a free, confidential consultation where we will discuss your situation and set you up on the path of becoming debt-free.
