Is CERB dischargeable in bankruptcy?

The Government of Canada is beginning to recover Canada Emergency Response Benefit (CERB) payments where it has been determined that it was paid erroneously or was an overpayment.  The Office of the Superintendent of Bankruptcy (OSB) has told us that erroneous or overpayment of CERB are provable claims in bankruptcy (or a proposal). You can file bankruptcy, or a consumer proposal, to eliminate CERB debt.

Here’s the explanation:

Erroneous or overpayment of CERB is a releasable debt in the event of an insolvency (bankruptcy or consumer proposal) given that it is to be treated as a debt owed to the Crown pursuant to subsection 13(2) of the Canada Emergency Response Benefit Act (CERBA).  An erroneous or overpayment of CERB does not automatically constitute a debt that survives discharge under section 178 of the Bankruptcy and Insolvency Act (BIA). Section 178 outlines very specific debts not released by order of discharge, and CERB debt is not listed in this section. Debts that are not forgiven include court fines, support payments, debts due to fraud, for example. As a result, CERB debt is discharged by bankruptcy, unless these payments were obtained due to fraud.

The Canada Revenue Agency (CRA) had previously interpreted self-employment income eligibility guidelines for CERB to mean net income, not gross income, which resulted in some self-employed workers receiving a notice of CERB repayment based on income levels. 

CERB eligibility and self-employment

After significant public outcry, the government issued an update on February 9 announcing that self-employed individuals who applied for CERB and would have qualified based on their gross income will no longer be required to repay the benefit provided they met all other eligibility requirements.

This change comes after weeks of speculation and criticism of the CRA for not providing clear guidance regarding the gross versus net income test. There is no longer a need to file adjustments to 2019 tax returns to reverse previously claimed deductions in order to increase net income. 

If you must repay CERB because you were otherwise ineligible, or have taxes owing, interest relief is available until April 2022 within specified conditions. If you are unable to pay, tax obligations due to CERB remain dischargeable in a bankruptcy or consumer proposal.

Original article

The Canada Revenue Agency has begun issuing formal collection letters for CERB repayment to recipients who may or may not have been eligible for the payments they received.

You may have received a letter from CRA regarding CERB payments to be paid back along one of two themes we’ve seen to date:

• You incorrectly received CERB payments from both Service Canada and the CRA
• You did not earn the minimum income required to qualify

Double payments

When it was rolled out, the Canada Emergency Response Benefit allowed Canadians whose employment was directly affected by COVID-19 to apply for benefits through Service Canada, or through the Canada Revenue Agency (CRA), but not both. CRA has issued a clear collection notice demanding repayment where someone has received payments through both portals.

Income eligibility

To be eligible for CERB, you must have earned employment or self-employment income of at least $5,000 in 2019 or in the 12 months before applying.

To verify your income, CRA will look at your 2019 tax return, and any T4 or other income slips sent into the CRA.

If they cannot verify your income, you will receive a letter that states:

Based on the records we have at this time, we cannot confirm that you meet this requirement.

If you have earned income that meets the qualifications, and if you haven’t already done so, simply file your 2019 tax return.

Unfortunately, the rollout of CERB led to a lot of confusion as to income eligibility. The following income is not considered employment or self-employment income:

• Pension income
• Disability benefits
• Student loans and bursaries
• Family support payments
• Social assistance payments
• Employment Insurance (EI) earnings
• Canada Child Benefits (CCB) or Working Income Tax Benefit (WITB)
• Investment Income

Based on phone calls to our office, there may be a significant number of Canadians who collected CERB, assuming these forms of income qualified.  Many were under the impression that if I cannot get a job due to COVID, I can collect CERB. However, technically that was not the case. For example, if you were on disability and did not return, you did not qualify for CERB.

How will CRA collect?

The CRA has strong collection powers. Currently, they seem to be taking a softer approach to the collection of CERB overpayments.

CRA is encouraging Canadians who were not eligible for benefits to repay CERB voluntarily. They understand that many may have made an honest mistake and appear to be waiving penalties and interest on overpayments – at least for now. And this assumes that you received CERB incorrectly through an honest error.

If you do not remit payment by December 31, 2020, CRA will issue a tax slip, which just means they say you owe that amount to CRA.

This means CRA can:

• keep any future tax refunds
• keep any benefits or credits, including CCB and WITB

To date, the CRA has not threatened stronger collection action, but that may change.

How a CERB overpayment will affect your future taxes

There is another complication if you need to repay your CERB but do not do so before December 31. Because CERB is taxable, any payments you receive in 2020 that you have not returned before December 31 will be included as income on your 2020 tax return. This means you will have to pay tax on the full amount of CERB you received in 2020. You won’t be eligible to get a ‘refund’ for this tax if you pay it back next year until you file your 2021 tax return – an entire year later. 

What if you can’t repay CERB?

The Canada Revenue Agency has certainly indicated its intention to verify CERB benefits and claw back as much as possible where the recipient should not have received any payments. However, they have also indicated that they understand that many who applied incorrectly did so honestly.

We recognize that some people who applied may have later realized they were not eligible.

A bankruptcy or consumer proposal does erase government debts unless those debts arose due to fraud. It is our expectation that CRA will likely decide to accept CERB debt as dischargeable in a bankruptcy or consumer proposal based on the merits of each individual case.

If you have received a collection letter from the CRA, you have three options:

• Pay in full: If you can afford to, CRA is requesting that you repay any amounts before December 31 to avoid having your next year’s tax refund affected. You can pay online, through your CRA My Account or by mail. Make sure to indicate or choose options that your payment is for ‘repayment of CERB’.
• Make repayment arrangements: If you need more time to repay but can afford to pay the full amount, talk with a CRA agent to arrange a repayment plan. You can contact CRA at 1-833-966-2099.
• Consider a bankruptcy or consumer proposal: If you cannot afford to repay the full amount, talk with a Licensed Insolvency Trustee about your specific situation to determine if a bankruptcy or proposal can help.

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Who collects student loans & when will they go into collection?

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In Canada, there are government and private student loans.

• Government loans can be federal, provincial or a combination of both. For example, in Ontario, you can have three types of government loans Canada-Ontario Integrated Student Loans, Canada Student Loans or Ontario Student Loans (OSAP).
• Private student loans are generally issued by banks in the form of student lines of credit or student credit cards.

Canada student loans

Your Canada student loan debt is sent to the Canada Revenue Agency (CRA) for collection when you miss nine months of payments. The CRA has expansive collection powers they can use to collect outstanding student debt, including withholding your tax refund, GST credit and more. I’ll explain more about CRA’s rights to collect later in this article.

OSAP loans

Unpaid OSAP debt is sent to a private collection agency you have missed making the required payments for 270 days. The collection agencies typically used by OSAP are ARO Inc., EOS Canada Inc, Financial Debt Recovery Ltd, or Total Credit Recovery.

Bank loans

If you default on private student loan payments, your bank or lender may use their in-house collection department, or they may send or sell your account to a third-party collection agency. Although six months is a general guideline, there is no set rule for when a private loan is sent to collection.

Your bank or other financial institution has no more rights to collect on a student line of credit than they do any other unsecured loan like a bank loan or overdraft, for example. However, it is common for private student loans to be co-signed. If your parents or anyone co-signed your student line of credit, the bank would look to them to make the payments if you are in arrears.

Monies owing to your university or college

You may also owe tuition, fees, residence charges or other costs directly to your university or college. Your school is an unsecured creditor, much like your bank or credit card company. If you owe money, they can also send your debt to a debt collector. However, universities and colleges can also withhold the issuance of your degree until all tuition, fees and outstanding interest have been paid.

Will my student loan arrears show on my credit report?

In short, yes. Late payments on your student loans will show on your credit report and can affect your credit score.

Canada Student Loans does report late payments on federal student loans to the major credit bureaus. In the case of private student debt, your bank or credit card lender will also report payment arrears to each credit reporting agency.

Late payments lower your credit score and remain on your credit report for six years. Eventually, the account may be marked as ‘in collection,’ which severely harms your credit rating.

Filing a bankruptcy or consumer proposal freezes late payments at the date of filing. However, Canada Student Loans often continues to report late payments during your proceeding. Once you receive your discharge or certificate of completion, you can contact the credit bureaus to erase all of the ‘late payments’ after your original signup date. Fixing this error will help your credit score by ensuring your credit history is accurate and allow these late payments to be purged six years from the date you filed insolvency. Your bankruptcy or proposal would be removed based on those retention periods.

What powers does the government use for student loan collections?

Having your government student loans sent to collection has consequences beyond what an ordinary debt collector can do to collect. This is because the Canada Revenue Agency has more power to collect on a debt than other creditors.

A non-government creditor must take you to court and obtain a judgement before they can garnish your wages or freeze your bank account. A garnishment order by a private lender is restricted to 20% of your wages.

CRA does not need to go to court to freeze your bank account or garnish your wages. They are also able to garnish 100% of your wages. CRA has the authority to take amounts from any government benefits or credits you receive even if you have a payment arrangement with them and are making payments.

CRA will keep your income tax refund to apply towards either your Ontario or federal student loan. It will also typically keep your GST refund.

Additionally, there is no limitation period for federal student loans. While ordinary unsecured creditors must pursue legal action within a specific time limit (2 years in Ontario), CRA can use its collection tools at any time.

The only way to stop CRA collection actions is to file a bankruptcy or consumer proposal.

How to get your student loan out of collection

When it comes to dealing with student loans in collection, there are a few things to consider.

Repayment assistance

The only payment assistance available through the federal government is through the Repayment Assistance Plan (RAP).  To be eligible for help under the Canada student loan rehabilitation program, you must be up-to-date on your student loan payments. However, if you have a defaulted loan that is already nine months in arrears and CRA is contacting you for collection, it is unlikely you can afford to bring your monthly payments current.

In that case, your next alternative to stop CRA actions is to talk with a Licensed Insolvency Trustee.

Is your student loan dischargeable?

Filing a bankruptcy or consumer proposal can be the right choice for a fresh start. Once you file, you will be under what is called a “stay of proceedings“. This stay provides you with automatic legal protection from creditor actions, including the actions of the CRA.

To know if your student debt can be discharged in a consumer proposal or bankruptcy, you must confirm your end of study date with both the Canada and provincial student loan departments. The Bankruptcy and Insolvency Act states that any debt under the Canada Student Loans Act or the Canada Student Financial Assistance Act survives a bankruptcy or proposal if it has been less than seven years since your last end of study date. The date you received any loan is not the deciding factor in what happens to your student loans after seven years.

For private student loans, the seven-year rule does not apply. Unsecured loans you took out with a private lender to pay for school can be automatically discharged through a bankruptcy or proposal. However, if these loans were co-signed and you file insolvency, your lender will pursue the co-signer for payment.

If your student loan debt survives your insolvency proceeding, talk with your trustee about the possibility of making payments to student loans during your filing. The stay of proceedings means you do not have to make payments, but it may make sense to at least make interest-only payments. You will need a letter from your trustee authorizing you to make voluntary payments.

Under the Bankruptcy and Insolvency Act, you can apply to the court to have your student loan debt discharged after five years. However, it is up to the judge to decide if it will make such a court order, and you must be able to prove financial hardship. This application is generally made with the help of a lawyer so you will need to consider the cost.

Are you in or planning on returning to school?

If you are currently in school or planning on returning, it is important to understand how defaulting on your student loans will impact your ability to receive new student loans.

Once your government student loans are in collections, you cannot receive further student aid until your loan payments, including outstanding interest, are brought current.

If you file a bankruptcy or consumer proposal to deal with government student loans, you cannot receive a new student loan until three years after your discharge or completion.

If you are in school or expect to return and need additional student loans, talk with both NCSL and your trustee before filing about the full implications of filing insolvency to deal with student loan debt.

Getting help

If you have student loans in collection with CRA, talk with a Licensed Insolvency Trustee about your options. We will look at how long you have been out of school, whether you have other debts that may prevent you from paying back your student loans and provide you with options that can help you move forward from your debt.

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Debt collection agencies are companies that specialize in recovering unpaid debts, and they may contact you to try to collect on overdue or defaulted accounts. Being chased by debt collectors can quickly turn into a nightmare, which is why many Canadians wonder how long collections agents can try to collect.

How long can a creditor pursue a debt in Canada?

The straight answer is that a collection agency can try to collect on a debt forever, but they only have a short window to pursue you legally to recover any money. Specifically, a limitation period sets a time limit during which a creditor can commence legal action by filing a claim with the court to collect on a debt.

Canada’s base limitation period is six years; however, many provinces have lowered that time limit to 2 years.

Is it legal for a debt collector to pursue a 20-year-old debt? Unfortunately, the answer is yes. A collection agency or creditor can try to collect an outstanding debt in perpetuity; however, through provincial statutes of limitation, you have a defense against any legal action once the limitation period has expired.

This means that even though a collection agency can continue to call and try to collect the debt, any legal action they might suggest after the time limit is up is an empty threat. Moreover, you have the right to file a complaint with the consumer protection office if you feel that the debt collectors are harassing you.

What is the statute of limitations in Canada?

The statutes of limitations for collection actions bars a creditor, or collection agency, from suing you after a specific time limit. After this time’s expiration, it is much harder—and often impossible—for a creditor to collect money from a debtor for an unpaid debt.

Canadian law starts with a limitation period of six years. However, each province and territory in Canada has its own statute of limitations. Each provincial limitation period as of January 2020 is as follows:

• Alberta: 2 years
• British Columbia: 2 years
• Manitoba: 6 years
• New Brunswick: 2 years
• Newfoundland and Labrador: 2 years
• Northwest Territories: 6 years
• Nova Scotia: 6 years
• Nunavut: 6 years
• Ontario: 2 years
• P.E.I.: 6 years
• Quebec: 3 years
• Saskatchewan: 2 years
• Yukon: 6 years

Limitation periods typically apply to unsecured debts. An old credit card debt, cell phone bill or gym membership account, for example, is subject to the limitation period. However, you cannot use provincial limitation laws to avoid a court judgment for:

• secured debt
• government debt, including student loans and tax debts
• non-dischargeable debts such as child and spousal support, fines and obligations arising out of fraud.

Provincial limitations laws do not apply to the Canada Revenue Agency. Generally, CRA collections has ten years to commence legal action for most tax debts and government student debt.

Can a collection agency re-age debt?

It’s essential to understand that the limitation period begins at the date of your last payment. It is possible to reset this starting point if the time limit has not yet expired. The limitation period starts over if you:

• Make a payment, even a partial payment
• Acknowledge, in writing, that you owe the debt.

Once a limitation period has expired, the starting point cannot be reset.

Debt collectors are very aware of this reset mechanism, which is why they will attempt to encourage you to make a small token payment as a ‘gesture of goodwill’ or send in a letter or email explaining your situation and asking for more time. Doing either of these can re-age the debt. Re-ageing a debt starts the limitation period for an old debt all over again, giving them more time to pursue legal action.

When an account is referred to a collection agency, the debt collector takes over the entire process of retrieving the outstanding money. When they do, they are in the same position as the original creditor in terms of how much they can collect and how. So, if your debt is new, your debt collector can still sue you. If it is an old debt and past the limitation period, they cannot successfully pursue any legal action but can, of course, continue to call.

Before you do anything in response to a demand for payment, look at your records to determine your last payment date. If you don’t know, pull a free copy of your credit report. See if that account is listed in your report’s accounts section and look at what the last payment date reported is.

Another way debt collectors attempt to re-age a debt is to report an old debt as in collection to the credit bureau. Collection accounts remain on your credit report for seven years. If a debt collector can get a 10-year-old debt back on your credit report, they know this may prompt you to pay or settle to have it removed. However, they cannot, by law, provide misleading information to a credit bureau. If this happens, contact the credit bureau and use the error dispute mechanism to remove the item. You can also report the collection agency for unfair or illegal practices.

What if your creditor wrote off the debt?

Accounts are generally referred to collection when a debtor stops making payments, and the creditor believes that there is a likelihood that the payments won’t be resuming anytime soon. This generally happens when your account is 90 days delinquent or longer, depending on your original creditor’s internal policies. After many years, they may also decide to sell your account outright to a debt buyer for pennies on the dollar.

When they send or sell an account to a collection agency, your creditor might decide to write-off or erase the debt from their books as non-collectible. Creditors often do this for tax reasons.

However, the debt does not go away just because the creditor wrote-off your debt in their records. A debt collector can still collect on a charged off debt.

What happens after the limitation period expires?

Even though you owe the money until the debt is paid or settled, a debt collector’s options are limited when the limitation period expires. At this point, calling and sending collection letters that demand payment before further action is taken are mostly just threats.

However, after the limitations period:

• Debt collectors can continue to call and ask for payment
• The debt will remain on your credit report for seven years from the date of last payment

If a debt collector does try to sue you after the limitation period, you can defend the action by notifying the court that the limitation period has expired. Failure to show up in court and plead this defense can result in a judgment favouring the collection agency.

Whether you choose to pay an old debt is up to you. It will fall off your credit after seven years, but collection agencies can still call. If you want to stop the calls, you can offer to settle. Only make this offer if that is what you intend to do. Otherwise, ignore the calls.

Whether the limitation period has passed or not, you have rights when dealing with a debt collector. Debt collectors can only contact your friends, relatives, neighbours, or employer to get your telephone number or address, but they aren’t allowed to suggest to them that you should pay your debts. They can’t use threatening or intimidating language and apply unreasonable pressure to force you to repay the debt.

If a debt collector has not respected your rights, you can file a complaint with the Financial Consumer Agency of Canada or provincial consumer affairs office.

How long does a collection impact your credit report?

There are two time periods to consider if you have an account sent to a collection agency:

• The statute of limitations which bars lawsuits or legal actions
• The length of time collection accounts will remain on your credit report.

A collections account will remain on your credit report for seven years, whether paid or not. Depending on the credit bureau, the debt will remain on record either from the date of your last payment or from the date you missed your payment due date. Having accounts in collection will lower your credit score and affect your ability to get a loan.

If your debt is older than that, likely, it will no longer appear on your credit report.

Making a payment, or partial payments, to a debt collector resets this clock as well.

So what do you do if the debt is too old under limitations law but is still on your credit report? You need to decide how this will impact your finances. Collection accounts will hurt your credit score and may limit access to a loan at reasonable rates. If you are not planning on borrowing any time soon, this may not matter. You can wait out the seven years for the debt to be removed from your credit report.

If you agree on a settlement, you can ask the collection agency to make a goodwill deletion. Get this in writing as part of your payment and release agreement.

Will a debt collection agency sue you to recover the debt?

We now know that if your debt is too old because it’s past the limitations period, a debt collector no longer has the legal right to sue even though they can continue to call.

But if the limitation period has not expired, will they sue?

Suing debtors costs money for lawyers and court fees. It also involves a lot of time and paperwork. A debt collector will have to consider the chances of succeeding in court and how much money they expect to recover against these costs. In most cases, if your debts are small, or if you have no income to garnishee or assets to seize, a debt collector won’t pursue legal action.

And remember, if a creditor sues you after the limitation period has passed, you have the right to file a statement of defense and argue that the debt is time-barred.

Can you get out of collections without paying?

Many Canadians believe that unpaid debt disappears at some point if you ignore it long enough, but the reality is that debt doesn’t stop existing unless you repay it. If you have unpaid debt, you will continue to owe money for the rest of your life.

This doesn’t mean, however, that you can’t get out of collections without paying. It’s a matter of understanding your financial needs and tolerance levels.

• If the statute of limitations on an unsecured debt has passed, creditors won’t have any legal means to seize your wages or go after your assets in court. If you can ignore the phone calls, you can choose not to pay.
• If the account is still on your credit report, it will hurt your credit score, but the impact lessens over time. If you don’t need access to new credit right away, you can avoid the debt collector. Remember, though, making a partial payment can worsen your score as the activity will be more current.

If you decide to make a payment arrangement with the collection agency, only offer what you can afford. Get any payment plan in writing, including a release of any unpaid amount. As mentioned, you can also ask that they remove an account from collection early.

If you are receiving calls on multiple debts you can’t afford to pay and want to consider some debt relief options, call us today.

It’s often a good idea to talk with a Licensed Insolvency Trustee before you start negotiating debt settlements. One of the disadvantages of settling your own debt is that you may not be able to get all creditors to accept a reasonable offer. Debt collectors do not have to accept any payment proposal. It may not be a good idea to pay off some creditors, only to struggle with some remaining debt. In many instances, a Licensed Insolvency Trustee can get all creditors into an affordable repayment plan through a consumer proposal. And of course, a consumer proposal also deals with debts like student loans and tax debts.

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Collection accounts and your credit report

If you have an account sent to a collection agency, your credit history has already taken a hit. Every month your creditor has been reporting missed or late payments to the credit bureau. Once the account goes to a debt collector, the debt is marked as a collection account.

Collection accounts significantly hurt your credit score and will do so for several years whether you pay them or not.  According to Equifax, Canada’s largest credit reporting agency, a debt in collection won’t be removed from your credit report until six years after your last payment date.

The problem with making a payment to the collection agency is that this new payment will reset how long that account will stay on your report.

To explain, here is an example:

You have an outstanding credit card bill that you haven’t made a payment on in two years; based on credit reporting rules, it will automatically disappear from your credit report in four more years.

You have the money, so you decide to pay the debt collector. Since debt collectors report activity to the credit bureaus, doing so creates a new ‘last payment date.’ Once you pay the collection agency, the debt will remain on your credit report for six more years, two years longer than not making a payment.  Even if the collection agency agrees to accept less than the full amount owing, it’s still on your credit report for six more years.

In other words, paying a collection agency can mean the debt will affect your credit score longer than not paying.

What happens if you don’t pay the collection agency?

You could simply not pay the debt. 

As I explained earlier, if you haven’t made a payment in a long time, by not paying, the debt is purged from your credit report earlier than if you pay the collection agency.

Now I don’t necessarily recommend this course of action. While the account might fall off your credit report, collection agencies don’t give up. They will continue to call, and you need to weigh the risks of whether the collection agency can or will sue, take you to court and garnishee your wages.

First, will a collection agency sue you?  If the debt is small, likely not. It costs money in legal fees to make an application to the court for a judgment (proving you owe the money) and getting a garnishment order.

Second, if the account is too old, the agency can’t sue you. All provinces in Canada have something called a statute of limitations. In Ontario, the limitation period is two years.  If you have not made a payment in the last two years, debt collection calls will continue, but they can’t legally sue you to collect.

And that’s one more reason why you should never pay a collection agency. If you make a partial payment, the limitation period starts over, so now the collection agency or your creditor has two more years to sue you in court.

What alternatives are there to not paying a collection agency?

Consider a debt management plan

If you have the money to pay the debt and want to clear it up, you could talk with a not-for-profit credit counselling agency and arrange a debt management plan. 

However, you must repay your debt in full, as this is a requirement with any payment plan through a credit counselling agency. A credit counsellor cannot settle your debt for less even if the collection agency is willing to accept less than the full amount.

A new note will be placed on your credit report when you enter into a debt management plan. This note will remain for two to three years from completion.  However, some creditors continue to report your monthly payment made through a collection agency as regular transactions, refreshing the last activity date. So the debt can remain on your credit report for six years after you complete your debt management plan. Since a DMP can be anywhere from 1 year to 5 years, that one account could impact your credit history for a long time if you go through a credit counsellor.

Make a settlement offer

If you have a single old debt and want to stop the calls, consider negotiating a settlement with the collection agency.  You can offer to pay the collection agency a percentage of what you owe and ask that the unpaid debt be written off. Depending on what you can afford and how old the debt is, start at 20 cents on the dollar and see what they are willing to accept.

Be aware that your settlement payment will update the last activity date meaning the debt will remain for another six years on your report.  To avoid this, as part of your settlement arrangement, ask the collection agency to purge the debt from your credit report right away.

File a consumer proposal

If you have a lot of debt and don’t have enough money to pay all your debts in full, it may not be a good idea to settle directly with one collection agency.  You may want to consider working with a Licensed Insolvency Trustee to negotiate a deal to eliminate all of your debts.

A consumer proposal wipes out all standard unsecured debts.  Whether or not this is a viable option will depend on what other debt obligations you have, along with other factors such as your income and any assets you may own.  However, if a consumer proposal is a viable option for you, you may be able to pay less than the full amount owing on all of your debts.

A consumer proposal is also reported on your credit report.  This note is removed the earlier of six years from the date of filing or three years after completion.  Since a consumer proposal provides a stay of proceedings, it prevents your creditors from recording payments and ‘refreshing’ the six-year purge period on your debts. This means each debt included in your proposal may be removed from your credit report sooner than with a debt management plan, and you save money by paying less than you owe.

In summary

It is important to deal with your debt. However there are times when you should not pay a collection agency:

• If you pay the collection agency directly, the debt is removed from your credit report in six years from the date of payment.
• If you don’t pay, it purges six years from the last activity date, but you may be at risk for wage garnishment.
• Through a not-for-profit credit counsellor, you can pay in full immediately, but the debt may not be removed until two to six years after you complete your DMP.
• If you qualify, you can file a consumer proposal, pay less than the full amount owing, and the debt will be removed from your credit report no later than 3 years after completion.

As you can see, it does not always make sense to pay a collection agency.

If you are struggling with debt and want to stop the collection calls, contact a Licensed Insolvency Trustee like Hoyes, Michalos. We will review your debts and budget during a free consultation and help you determine the best way to deal with your debt.

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Where are your lender’s rights?

Your credit card, loan or mortgage documents set out your lender’s contractual rights and remedies in the event of default. Creditors also have the right to pursue you through the court system.

A secured creditor, like your mortgage or car loan lender, has additional rights to seize property listed as collateral in your loan agreement.

In contrast, unsecured creditors, such as credit card debt and payday loans have no collateral, but that doesn’t mean they can’t enforce collection in some way. While they cannot repossess items you purchased with the money, they or their debt collector can sue you through the courts.

Government creditors like the CRA have enhanced collection powers that allow them to seize assets and keep your tax refund without court proceedings.

What can happen if you don’t pay your bills?

A late payment or two does not mean a creditor will immediately call in a collection agency or take you to court. Creditors will start by contacting you themselves to arrange a repayment plan. Don’t ignore these early warning signs. Failing to work with your creditor will ensure they escalate the situation further to recover money if you have not paid your debt.

If you choose not to reply to your creditor’s initial requests for repayment, then they can carry out some of the following legal actions:

• Placing a negative mark on your credit report
• Charge late payment fees
• Increasing your interest rate
• Sending your account to a collection agency
• Freezing your bank account
• Seizing assets
• Wage garnishment

Below I review how these different actions work and the implications for you financially.

Credit reporting

When you miss a payment, and the account is past due, it is considered delinquent. It’s not unusual to accidentally miss a payment by a couple of days. If you respond to the initial email reminder that your payment is late and pay up, in most cases, your credit will not be affected. Most creditors will not report a late payment until at least 30 days after the due date.

Late payment penalties

Almost all loans have late payment penalties. For example, your credit card company may charge a late payment fee of $35, even if you are only one day late. If this was an error and you have a relatively good history with your creditor, you can sometimes get them to waive this fee. However, multiple late payments get very costly.

Some lending agreements also have interest rate escalation clauses, which state that, in the event of a missed payment, your low rate will increase.  This is especially true if you have an introductory or teaser rate credit card.

Sending your account to a collection agency

After initially trying to collect themselves, creditors may send your debt to a collection agency. Legally they can send your account to a collection agent once it is over 30 days past due; however, most creditors will hold off outsourcing collection for 90 to 180 days. For accounts that are significantly past due, companies prefer to use outside agencies to save costs and to preserve their reputation. Collection agencies are generally more aggressive when making contact because they get paid by commission.

It’s less than ideal to have your debts sent to collection agencies because this creates another negative mark on your credit score. The individual credit account, or debt, will be marked as ‘in collection’. Collection accounts will remain on your credit report for six years.

It’s worth noting that collection agencies must legally follow all debt collection laws, such as only contacting you at certain times and on certain days. If you are receiving collection calls, it’s essential to know how to deal with a collection agent. Nevertheless, repeated collection calls are much more stressful and harder to ignore than the occasional late payment notice.

Commencing legal action through the courts

If you have not made payment arrangements, your creditor’s next step may be to threaten you with legal action. The purpose here is to pressure you into paying the funds back if you are financially able, or to begin the legal process needed to realize on any security or garnish your wages.

A collection agency can sue for an unpaid debt, however suing someone for not paying their debts takes time, effort and money for legal fees. This means that it’s not going to happen over a few outstanding utility bills or a couple of hundred dollars in credit card debt. You can, however, expect to be taken to court if you have a decent amount of outstanding debt at typically $10,000 or more.

For unsecured debt, there is also a statute of limitations that prevents creditors and debt collectors from successfully taking legal action after a specific amount of time has passed. In Ontario, that limit is two years.

Obtaining a Judgment Order

The initial objective of a lawsuit is to obtain a judgment order from the court, confirming that you legally owe the money and must pay it back. You can defend a lawsuit either by proving you do not owe the debt or by claiming the debt is past the limitation period. Of course, it’s also possible to stop the action by paying the debt if you can.

If you’ve reached this stage and are unable to pay the debt, you may need the creditor protection to stop a lawsuit provided by a bankruptcy or consumer proposal. This works for unsecured debt, but will not prevent secured creditors from enforcing their security rights.

Enforcing collection

Generally speaking, being taken to court only happens if you’re in a lot of debt, and you have income or assets available. If a creditor or collection agent wins a case in court and receives a default judgment order against you, then they can apply to:

• Garnishee your wages
• Freeze your bank account and demand any deposited amounts are directed to them
• Seize non-exempt property
• File a lien on your property, which will remain and must be settled before you sell

Types of property creditors can take away if you do not pay your debts

As already mentioned, the type of debt you have can affect what collection actions your creditors are allowed to take, and this is mainly concerning their rights on property seizure and re-sell.

Home foreclosure

When it comes to not paying your mortgage, the mortgage lender can take certain steps to collect from your property through an approved legal procedure of a power of sale or foreclosure.

In this circumstance, your creditor can force sale your home by either obtaining the right to sell it or taking complete ownership. Stopping a foreclosure requires you to bring your mortgage current either by refinancing with a second or new mortgage. You also need to be able to maintain all future payments. If you have a lot of unsecured debts like credit card debt, lines of credit or payday loans, you may want to consider filing a consumer proposal or bankruptcy to eliminate these debts to make your mortgage payments more affordable.

Vehicle repossession

If you fail to make your car loan or lease payments, your vehicle financing company can take steps to repossess your vehicle. If they do, they will sell the vehicle and sue you for any shortfall. This shortfall can be eliminated through a bankruptcy or proposal.

Wage garnishment

Unsecured creditors do not have a direct claim on a debtor’s property. They can ask the court for an execution order, which allows the creditor to seize or place a lien on property not otherwise exempt under provincial exemptions.

An easier process is for a creditor to ask the court to issue a wage garnishment order. A wage garnishment will require your employer to withhold a portion of your wages until the debt is paid in full.

You can stop a wage garnishment by paying the debt or by filing a bankruptcy or proposal.

Freezing your bank account

Another option open to general creditors (credit card debts, lines of credit, financing loans, payday loans, for example) is to ask the court to seize funds in your bank account. Your creditor will then notify your bank to freeze your account and forward all money in the account (including future deposits) to them until the debt is paid off. All future deposits, including your paycheque, are available for seizure.

Right of Offset

In the special case that you owe money to the same bank that you have a deposit account, your bank can take money from your bank account any time without court approval.  This is known as a bank’s right of offset.

Revenue Canada has a similar right in that if you owe money to the government (for taxes, student loans or EI overpayments, for example), the government can keep your tax refund to offset this debt.

Exempt property

Unsecured creditors can also ask the court to give them a Writ of Seizure or Writ of Execution against your car or another asset. All provinces have laws that provide a list of assets creditors cannot seize. These exemptions apply if you file bankruptcy, but limit general creditors as well. In Ontario, you have five days to claim your exemption if you don’t do so through a bankruptcy or consumer proposal.

Other common questions about creditor actions

Can a creditor force you to file bankruptcy?

Legally yes, but practically no. It is very rare for a creditor to petition an individual into personal bankruptcy. Creditors know they are likely to receive less in bankruptcy than if they continue to pursue other court actions. However, this does not stop collections agencies from threatening to petition you into involuntary bankruptcy to scare you into paying.

Can a collection agency take you to court?

If your creditor has entered into a contractual agreement with a collection agency to collect on your debt or has purchased your debt, the debt collector has the same rights as your original creditor to sue you in court.

How long can creditors or collection agencies pursue me?

Technically debts never go away. A delinquent account will fall off your credit report in six years, and creditors (or collection agencies) are subject to the limitation period to initiate a lawsuit. Still, they can and will continue to call to collect as long as they feel there is a financial benefit to them.

Where to find help if a creditor or collection agency pursues you

Ignoring your debts won’t make them go away, and here at Hoyes, Michalos & Associates, we can help.

If you can afford to pay back the debt, there are ways that it can be made easier by creating a budget, prioritizing certain payments or consolidating your debts into one loan, which you will pay off monthly.

You may need formal creditor protection, and this protection is provided through a Licensed Insolvency Trustee by either a consumer proposal or bankruptcy. Both options deliver a legal stay of proceedings, which stops further collection actions from happening.

Have you been threatened with legal action? Are you undergoing wage garnishment? Are you at a loss of what to do and who to turn to?

If so, contact us today at 1-866-747-0660 to review your debt relief options.

The post Legal Actions Creditors Can Take If You Don’t Pay appeared first on Hoyes, Michalos & Associates Inc..

If you want to know more about handling the calls and talking to a collection agent, read our tips on dealing with collection agencies.

Calls and contact – when, how often, who, what can they say

What times can a collection agent call me?

Most provincial rules say that a debt collector can only call you between 7 AM and 9 PM Monday through Saturday and Sundays from 1 PM to 5 PM.  Weekday hours in some provinces are extended to 10 PM.

Debt collectors are not allowed to make phone calls on statutory holidays.

How often can a debt collection call me?

Not all provinces have specific rules regarding the number of times a collection agency can contact you. In Ontario, agents can only email, leave a voicemail or speak with you a maximum of 3 times a week after they have initially spoken with you. If you have never answered, however, this rule does not come into play. This is why, if you have an account in collection, you may experience a Robo-dialer calling you every day at different hours of the day.

There are also rules against undue harassment. If you feel the frequency of calls is excessive, you can file a complaint. We’ve provided the contact information on where to file a complaint at the end of this guide.

Can a collection agent call my cell phone?

You have the right to ask a collection agency to stop using any form of communication that requires you to incur costs. Because cell phones come with usage and data costs, you can demand that they no longer call your cell phone number. A collection agency is also required to reimburse you for any costs you incur if you ask.

Can I ignore collection calls?

No law states you must answer or talk with a debt collector. You are free to ignore the call or hang up. However, neither the debt nor the calls will go away on their own.

It is best if you deal with collection agents in a forthright and professional manner. If the debt is not yours, tell them that. If you can’t afford to pay or the debt is too old (see legal actions below), give them a simple explanation and say you will not be paying.

If your debt is large, or you have other debts you cannot afford to pay, you may want to review your debt relief options to eliminate debt.

Can a collection agent call my employer?

A debt collector can contact your employer to confirm your employment, get your telephone number or address or enforce a wage garnishment. 

When contacting your employer, a collection agent is not allowed to discuss any personal details regarding your debt.

Can a collection agent call my friends & family?

Generally, collection agencies can only contact someone you know to obtain your phone number and address. They must not reveal any information about the name of the debt collection agency or your debt. Again, be aware of the harassment rules if they are phoning someone you know multiple times.

The only exception is if someone has co-signed or guaranteed your loan. A collector may call them if the agreement you signed with your original creditor provides that permission.

Can a collection agent come to your house?

In theory, yes, this can be a form of contact. However, agents are typically paid a commission, so they rarely spend the time necessary to make a “house call”. Robocalls are cheap, so they are the preferred contact method.

An exception may be finance companies collecting a larger debt and a creditor who may have a lien on your household furniture. If you fall behind on secured payments, a creditor or their designated collection agent can come to your home or workplace to seize property.

Can a collector set a deadline for payment?

If the collector offers you a settlement, they can provide a reasonable timeline for you to accept their offer. Collectors cannot, however, use excessive or unreasonable pressure to get you to make a payment. 

Collectors often like to say something like “If you don’t make a payment this week, we will garnish your wages.” An action like that takes time, including providing you with written notice and a trip to court.

A new tactic is for bill collectors to threaten you with an involuntary bankruptcy. Again, this is rare in the case of personal debts. Debt collectors generally use these tactics as threats only. Do not let a collection agent pressure you into a bad settlement agreement or action you do not want to take.

Can two collection agencies call me for the same debt?

No. A debt can only be placed with one debt collection agency at a time. You may receive a call from more than one agent at that agency, however. Confirm the name of both the agency and the agent before discussing your situation. Obtain proof that they are authorized to collect on the debt before making any payment. If you are unsure, contact your original creditor.

Payments

How much can debt collectors ask for?

Collection agencies step into the shoes of the original creditor when collecting a debt. It does not matter whether they are working on behalf of your creditor or they have purchased your debt. Their rights to collect are no more than is allowed in the contract or agreement you signed. They can only collect as much as the original creditor could collect.

Can a collection agency charge interest?

The collection agency can charge interest only under the terms allowed by your original creditor. They cannot raise rates beyond what is allowed in your contract.

Can the debt collection agency charge me a collection fee?

A debt collector cannot charge you for collection costs, including legal costs, unless such a clause was in your agreement with your creditor, or they get a court order. If you make a payment arrangement with the debt collector, they may charge a fee for bounced cheques; however, this fee must be previously disclosed and reasonable.

Can the collection agent settle for less than the full debt?

Only if they have authorization from the original creditor to do so.

Before you enter into a settlement agreement, do two things: get the agreement in writing and ensure they have authorization from the creditor to erase your entire debt for a paid settlement amount.

Should I pay my creditor or collection agency?

This depends. If the debt was sold, no. The collection agency now owns the debt, and you can only make payment to them. Even if the collection agency is working on behalf of your creditor, we generally recommend making payment arrangements through the authorized collection agent to avoid confusion.

Legal actions

How long can a collection agency collect debt in Canada?

There are no time limits to how long a collection agency can contact you to request payment. There is, however, a limitation period during which they call to pursue legal action to enforce payment. In Ontario, for example, a debt is considered too old two years from the date of the last activity.  This means that while a collection agency can call you for a 10-year-old debt, they cannot, for example, obtain a wage garnishment for this debt.

Can a collection agency take me to court?

A collection agency could sue you if the original creditor had the right to do so. However, this takes time and money, so an agency is unlikely to take you to court for a small debt.

If the debt is beyond the statute of limitations, you can also defend the lawsuit by saying that the debt is beyond the statute of limitations for your province.

Can a debt collector send me to jail?

No.  This is a common threat that collectors might use. You cannot go to jail for an unpaid debt in Canada. If your debt collector threatens you with this, file a complaint.

If the debt arises out of fraud, your creditor or collection agent may decide to have you charged criminally if they feel this is warranted.

What is the minimum amount a collection agency will sue you for?

While there is no hard-written rule, most agencies will not pursue legal action for debts under $3,000.  They must also believe you have sufficient income to be able to pay and will not likely sue you for a debt that is past the limitation period (although they may threaten to do so).  The agency must have sufficient documentation to satisfy the court that the debt is valid, and that they have the right to collect.

Can a collection agency freeze my bank account?

If your original creditor had the right to ask the court for an order to freeze your bank account, your collection agency has this right as well. Whether they will or not depends on the size of the debt since this involves going to court. If the debt is old, the limitations period applies to stop this type of action as well.

Can a collection agency garnish my wages?

A collection agency can apply to the court for an order to garnish your wages the same as your creditor. They must first obtain a judgement order from the court before asking for an order to garnish your wages. If the debt is small or old, the collection agency is unlikely to take this action as it involves legal fees.

Can a debt collection agency garnish pension income?

No. While the Wages Act allows for the garnishment of wages, the pensions act in most provinces does not have such a provision. In other words, there is no law permitting a creditor, or their legal designate, to garnish pension income. The only exception to this rule is the CRA, who can garnish CPP, child tax credits or other government payments if you have not paid taxes.

Can a collection agency repossess my property?

Creditors can take action to seize your property without the need of a judgement for secured debts. A landlord also has the right to seize property for unpaid rent. If a collection agency is collecting on behalf of a secured creditor, they can take action to repossess property related to the loan.

That means they can repossess your vehicle if collecting on a car loan, or take back household goods like a furniture or tv if your loan or lease agreement allows. You will be notified of such action.

Can a collection agency take my RRSP?

Whether creditors can access your retirement savings depends on where those savings are.

Creditors cannot seize Registered Pension Plans (RPP) except if your debt is owed to the Canada Revenue Agency.

The Bankruptcy & Insolvency Act protects RRSPs in the event of bankruptcy, except for contributions made in the last 12 months. If you have not filed for bankruptcy, you do not receive this creditor protection.

Some provinces have specific legislation protecting some registered plans outside of bankruptcy. This area is sufficiently complicated that you should discuss the situation with a Licensed Insolvency Trustee.

Can a debt collector take my CERB or CRB benefits?

The new Canada Recovery Benefit (CRB) (previously CERB or Canada Emergency Response Benefit) provides income support to individuals who have lost income due to COVID-19.

Under current legislation, Canada recovery benefits are protected from creditor actions. They cannot be assigned as security for a loan and cannot be garnished or seized by any creditor, including the Canada Revenue Agency.

Credit reports

Do collection agencies report to the credit bureau?

Your original creditor will report your debt activity to the credit bureau, including any late payments. Once your debt is in collections, the debt will show on your credit report as sent to collections. Some collection agencies will report continuing payments if you go on a payment plan.

Watch for collection agencies falsely reporting a payment to your credit bureau to begin the six-year clock for when negative payment information is removed from your report. If this happens, contact your credit bureau to correct any error on your credit report. You can also file a complaint with both the provincial legislator and your original creditor, assuming the agency is working on their behalf.

How long does an account remain on my credit report?

Accounts in collection have a negative impact on your credit score and remain on your account for six years from the date of your last payment.

Once the account is paid, either the collection agent or original creditor will report the account as paid or settled. As part of your settlement agreement you can ask that the collection agency remove the item from your credit report. Get this in writing as part of your release agreement.

What should you do if you are being pestered by a collection agency?

How to file a complaint with the ministry of government and consumer services

If you feel the collection agency disobeys any of these rules or is harassing or threatening you, you can file a complaint with your provincial consumer affairs office. Here are links to federal and provincial consumer protection legislation resources.

If you believe a collection agency is harassing you, keep a record of the call’s time, date, and frequency. If you decide to make a formal complaint against the collection agency, you will require this information.

Where can I get help with debt problems?

Ignoring collection agent’s attempts to contact you will not help you solve your debt problems. If you do owe money and need help forming a plan to settle that debt, contact a licensed professional for a free, confidential consultation on reducing your debts and stop the calls for good.

It may not be in your best interest to pay the collection agent. If your debts are significant, talk with a trustee before agreeing to anything.

The post What Can A Collection Agency Do to Me? Top Collection Rules appeared first on Hoyes, Michalos & Associates Inc..

Depending on which method is used, and where you are in the process, your options to remain in your home and your financial outcome may differ.

Below, I explain both processes and highlight the key differences between the two. I provide you with options that allow you to stop a power of sale or foreclosure and keep your home if that is what you can afford and what you wish to do.

Basics of a Power of Sale

A power of sale is the most common forced sale process used in Ontario when a homeowner fails to repay their mortgage. In a power of sale, a mortgagee (the lender in a mortgage) obtains the legal right to evict residents of a property and sell the property to recover funds owing.

Lenders prefer the power of sale over foreclosure because the process is faster, involves less court time, and legal costs are lower. A lender need only wait 15 days after a missed payment to begin a power of sale process. The process involves:

• the issuance of a Notice of Sale by the lender,
• 30-40 day redemption period during which you can bring mortgage arrears current,
• the issuance of a Judgement by the court and finally,
• a Writ of Possession giving the mortgage lender the right to evict occupants (with the assistance of the Sherriff) and sell the home.

In a power of sale, a mortgage lender has a fiduciary duty to sell the property at fair market value. In the power of sale, any proceeds above the mortgage debt are paid to the homeowner.  If the lender makes a quick sale at a discount, the homeowner can sue the lender for any loss in equity they should have received.

Typically, on completing a power of sale, mortgage lenders don’t earn any additional profit. If a home has equity, most homeowners will refinance to bring the mortgage current and avoid a forced sale.

In a power of sale, the lender retains the right to sue the borrower for any shortfall if the sales proceeds do not fully cover the full balance owing plus costs and fees. This shortfall becomes an unsecured claim since there is no longer any property to secure the debt.

Basics of Foreclosure

In a foreclosure, a mortgage lender takes title to the property. What this means in real estate law, is that the lender has complete legal ownership and right over the property to do with as they please. They can rent it out or sell it.

The foreclosure process is similar to that of a power of sale but takes much longer, often a year or more, compared to less than six months for a power of sale. A lender generally does not even begin the court process until several months of missed payments have occurred.

Since the lender legally owns a property after a foreclosure, they do not have the same duty to sell for the highest price. They also keep all proceeds above the mortgage debt for themselves. No equity or profits are returned to the mortgagor or homeowner.

In a foreclosure, the mortgage lender loses its right to sue for any shortfall.

Differences between a foreclosure and power of sale

Foreclosure proceedings and power of sale are different processes, but they share a lot of the same legal documents from start to finish. Both procedures start with a Notice of Sale, then a Statement of Claim followed shortly by the Writ of Possession.

It is in the Statement of Claim that you will see whether the action chosen for your property is a foreclosure or power of sale. As the homeowner, you need to be aware of the fundamental differences between both options.

What to do if threatened with a forced sale of your home

A house can cost a lot of money, and with other financial pressures such as car repayments and credit card loans, it’s easy for monthly payments to become too much.

However, we understand that a house is likely your biggest asset. While you may be struggling financially to keep up with repayment, you may very well want to get out of debt and keep your home, avoiding a power of sale or foreclosure entirely.

First things first: you need to review your budget and see if you are struggling to keep up with your mortgage repayments because you purchased too much home or if it is a mixture of other unsecured debts like credit card debt that is causing your debt problems.

Either way, there are financial options available to avoid a power of sale or foreclosure on your mortgage. However, the sooner you act, the more options available to you.

You can stop a forced sale during the redemption period by catching up on missed payments and fees. After the redemption period, your lender has the right to demand repayment of the entire mortgage, which can be much more challenging to deal with if you are having credit problems.

Here are some options to consider:

• Refinance with a second mortgage. You can get a second mortgage to bring the mortgage current. If you’ve got positive equity in your home, this can work. However, you need to be sure you can afford your future monthly mortgage repayments too.
• Restructure your mortgage with a different lender. Lengthening the amortization period of your mortgage can reduce your monthly payments, so they are mort affordable. If your bank or financial institution is not willing to negotiate a new mortgage, you can talk with a mortgage broker about finding a new lender or private mortgage.
• Downsize or sell your home yourself. If it looks like your financial problem is your mortgage payments because they are too expensive, then you could look to sell your home and buy a smaller property before you are evicted. You could also look into renting for a short time until you are back on your feet financially.
• Clean up other debts with a consumer proposal. If other unsecured debt is the cause of your budget shortfall, you can use any equity in your home to make a proposal to your creditors to reduce your monthly credit card and bill payments, making your future mortgage payments more affordable.
• File bankruptcy and keep your home. A consumer proposal avoids bankruptcy. However, if bankruptcy is a better way to eliminate troublesome unsecured debt, it is still possible to keep your home and file bankruptcy if you can keep your mortgage payments current.
• Walk away from your mortgage and file insolvency for any shortfall. If your mortgage is underwater (the mortgage is more than the home’s value), you can hand the property to your lender. If there is a shortfall post sell, this shortfall can be discharged through bankruptcy or a consumer proposal.

Advantages of talking with a Licensed Insolvency Trustee when you have mortgage arrears

If you are struggling with mortgage and non-mortgage debt and want to keep your home, it is a good option to talk with a Licensed Insolvency Trustee as well as a mortgage broker.

A mortgage broker can help you refinance and introduce you to a private mortgage lender. However, high-risk mortgages come with higher interest rates and may not be your best option if they also suggest rolling unsecured debt into the new mortgage. There are considerable risks in consolidating unsecured debt into a secured mortgage.

At Hoyes, Michalos and Associates, we can help you explore options that can help you clear up debts and find a way to make your mortgage repayment affordable. We can provide a second opinion on your budget and which alternatives will leave you stronger financially after restructuring your debt.

We offer free consultations, no matter what your situation.

The post Power of Sale vs Foreclosure Explained appeared first on Hoyes, Michalos & Associates Inc..

In Canada, bankruptcy and mortgage foreclosure are two different legal proceedings. In this guide, I’ll explain the difference between bankruptcy and foreclosure, how each affects your ability to keep your home and whether bankruptcy proceedings can stop a foreclosure or prevent your mortgage lender from seizing your property.

Secured vs unsecured debt

In the world of credit, there are two types of debt: unsecured and secured debt.

Unsecured debt is any debt where you do not have an asset as your collateral, for example, a credit card. When you are in default on an unsecured debt, your creditor may send or sell your account to a collection agency, and that company will call you to collect. They may attempt to sue you for what you owe them and try to garnishee your wages, but that’s about all they can do. An unsecured lender has no hold on your things. They have no legal rights to repossess your assets. 

Secured debts do have an item behind them. They have collateral behind the loan so that if you do not pay the creditor, they can seize your property. A mortgage is a secured debt where your house acts as collateral and provides security to the lender in case of default. If you don’t pay your mortgage, the mortgage lender will call you, but as a secured creditor, they have an extra power they can use to recover their money: they can foreclose on your home.

How mortgage foreclosure works in Canada

Foreclosure can happen when the mortgage lender isn’t getting paid. If you stop making your mortgage payments, your mortgage lender can take you to court and sue you, and if the court agrees, the lender can take over title to your property.

A foreclosure is the transfer of full ownership in a property to the mortgage lender. In a foreclosure process, the mortgagor, or homeowner, gives up all rights to the property, including any equity value built up in the home. Once your mortgage lender forecloses on your property, they own it. They can do what they want with it, which may mean fixing it up, renting it out, or most likely selling it.

Foreclosure is a lengthy and costly process. Your lender will first file a Statement of Claim with the court, to which you have 20 days to respond with a defense. After that period, your mortgage may be declared in default. Your lender will next ask for a remedy in the form of a foreclosure order. If the court feels there is any chance you can catch up, the court can issue a Redemption Order. The Redemption Order gives you a stated period of time to get current with your mortgage payment.

Usually, the redemption period is six months. You can ask the court to extend the time, and the lender may ask the court to shorten the time. 

The key here is you can stop foreclosure proceedings if you either get current with your mortgage payments or pay off the mortgage during this time frame. 

Remember, everyone wants a win here. The court does not want to see you out on the street, and the lender just wants their money. If the court can find a way for you to stay in your home and the lender to receive their money, the court will take that route.  If a lender can get you to make payments, they will generally choose this option over the foreclosure process. 

It’s in your best interest and the lender’s best interest to come up with a plan that works for both parties. 

This is where bankruptcy can help.

Bankruptcy as a preventative measure

Bankruptcy does not deal with secured debt, so filing bankruptcy itself will not legally stop a foreclosure order. However, a bankruptcy proceeding can work as a proactive decision to eliminate other problem debt and improve your cash flow enough that you can afford to catch up on your mortgage payments.

When you file bankruptcy, you don’t necessarily have to lose your home. If you can keep your mortgage payment current, Canadian bankruptcy law protects you. Rules around bankruptcy and mortgages say that a secured lender such as your mortgage holder may not cancel your loan just because you’ve declared bankruptcy or filed a consumer proposal.

In any bankruptcy proceeding, you do have to deal with any non-exempt equity in your home. For example, in Ontario, if the equity in your home is above $10,000, you will have to arrange to pay the equivalent to your Licensed Insolvency Trustee if you want to keep your house. To make these payments more affordable, you can consider a consumer proposal as an alternative to bankruptcy. Bankruptcy and home equity laws vary by province, so it is important to speak with a Licensed Insolvency Trustee about your situation.

Foreclosure vs Power of Sale

As I noted earlier, in a foreclosure, the lender obtains legal title to the property. This means any profits or equity from the sale, go to the lender. However, the foreclosure process does not give the lender the right to sue for any shortfall. If the home sells for less than the mortgage balance owing, your mortgage lender posts a loss and cannot look to you to recover the difference.

It is because of this inability to sue for a shortfall, combined with a very long and expensive process, that we see very few foreclosures in Canada. Add to that, any borrower with equity in their home will work hard to find a way to bring their mortgage current rather than lose that equity through foreclosure.

What is more common in Canada as a way to collect on mortgage arrears is a process called a power of sale. In a power of sale, the lender goes to court to get permission to evict you from the property and then sell it. They do not own title to your home; instead, the court gives the lender the “power” to sell the property.

The potential financial outcomes for the homeowner in a power of sale vs foreclosure are very different. In a foreclosure proceeding, any “profits” go to the lender, but in a power of sale, if there is money left over after paying the mortgage and costs, it gets returned to the homeowner. Conversely, if there is a shortfall, a lender has no recourse under a foreclosure but does retain the right to sue the borrower in a power of sale.

Foreclosure is rarely used with residential real estate, while a power of sale is more common.

Bankruptcy to deal with mortgage shortfall

When you declare bankruptcy in Canada and are underwater in your mortgage, the difference between the mortgage balance and sale value, or shortfall, is now an unsecured debt. There’s not enough collateral to back it up. In a bankruptcy or consumer proposal where you give up your house, you do not have to pay for the difference between what you owe and what the home is worth. 

Given the real estate market in Canada, most shortfalls involve insured mortgages, which involve high ratio mortgages. In this case, it is generally the mortgage insurer (CMHC or Genworth) that will pursue you.  CMHC is very slow to act; I’ve seen people pursued ten years after the house was sold. However, that does not mean you should rely on this and wait. CMHC is the government, so they can seize tax refunds to get their money.

What are your options if you are behind on your mortgage?

If you have fallen behind on mortgage payments, it’s in your best interest and the lender’s best interest to come up with a plan that works for both parties. Lenders just want their money, and you may just want to keep your home. If you can’t catch up, there are other options to stop or deal with the financial results of foreclosure for mortgage arrears.

Ask for a payment deferral. This was a common occurrence during COVID-19, but mortgage lenders have been granting short term deferrals or mortgage extensions in extenuating circumstances long before the recent economic crisis.

Renegotiate the mortgage. If you have a 15-year amortization, the lender may agree to a loan modification to restructure your mortgage under a 25-year amortization, for example, and include all arrears in the new mortgage. You now have no arrears and a lower monthly mortgage payment because it’s stretched out for a longer time.

Find a new lender. If your lender won’t renegotiate, get a payout figure and consider a new mortgage with another mortgage lender. Be aware that alternative, private mortgages come with a higher interest rate to compensate the lender for the added risk. Refinancing is more viable if you have higher equity in the home.

Sell the house yourself before the bank can foreclose. You may get a better price than your lender, but more importantly, if you expect there to be positive equity after the sale, you want to retain any potential capital gains for your own benefit.

File a consumer proposal and keep your home. If you are struggling with your mortgage payments because of other debt problems, filing a bankruptcy or consumer proposal before foreclosure can help you clean up your finances and make homeownership more sustainable.

Walk away, and let the bank take possession. Sometimes we buy more home than we can afford. And if the value of your home drops below your mortgage balance, you may be better walking away before the foreclosure and letting the bank file an unsecured claim in your bankruptcy or proposal.

If you’re struggling with debt, we can help you explore debt relief options. Bankruptcy is one solution, but it’s not your only solution. 

The post Complete Guide to Bankruptcy and Mortgage Foreclosure appeared first on Hoyes, Michalos & Associates Inc..

Is that a real thing? 

Can a creditor, or bill collector, force you into bankruptcy? What is an involuntary petition, and should you be worried about it?

Not really. Here’s what’s happening.

Receiving a collection letter from a law firm

This all started with a call I received from a client after he received a notice from what he thought was a collection lawyer (it was actually from a paralegal) threatening to petition him into bankruptcy for an unpaid debt.

Here is an excerpt from that collection letter:

You have failed to satisfy the above-noted claim voluntarily, and your file has been assigned to our firm with the intention of filing an Application for Bankruptcy Order (“Application”), pursuant to section 43(1) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 ( BIA).

We are writing to inform you due to your failure to satisfy this debt despite numerous opportunities, we are now in a position to proceed with an Application. Your failure to satisfy this claim despite numerous opportunities constitutes an act of bankruptcy, as listed in section 42 of the BIA.

A Bankruptcy Order allows for the seizure and liquidation of all your real and personal property and/assets for the benefits of all your creditors, pursuant to sections 16(3), 17, 18, 30, 71 and 158 of the BIA. Should our Application be successful, you cannot be a director of a corporation, pursuant to section 105(1) of the Canada  Business Corporations Act, R.S.C., 1985, c. C-44 and section 118(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.

Obviously, after receiving this letter, the individual called very afraid that he would be forced into bankruptcy.

Who can petition the court for a bankruptcy order?

Yes, the Bankruptcy & Insolvency Act (the Act) has a legal process for involuntarily assigning someone into bankruptcy.  If a debtor has committed an act of bankruptcy, a creditor can go to court and ask the court to force the debtor into bankruptcy.

First, section 43 (1) of the Act says one or more creditors may file in court an application for a bankruptcy order against a debtor if it is alleged in the application that:

1. the debt or debts owing to the applicant creditor or creditors amount to one thousand dollars; and
2. the debtor has committed an act of bankruptcy within the six months preceding the filing of the application.

An act of bankruptcy is defined in Section 42, which can include where you:

• cease to meet your liabilities generally as they become due
• provide a statement that you are insolvent or are unable to pay your debts
• give notice that you have suspended or are about to suspend payment of your debts

In other words, if you owe at least $1,000 and are not repaying your debts, a creditor can technically petition you into involuntary bankruptcy. However, that does not mean they will.

Real threat or collection tactic?

If you owe money, a collection agent will contact you and demand payment. If you don’t pay, a debt collector can take legal action to collect. They can take you to court, sue you and garnishee your wages. In certain rare cases, a creditor can even threaten to seize your car for unsecured debt.

However, there are a lot of reasons why threats of a lawsuit don’t work.

• If the debt is small, the legal fees to take you to court will outweigh any possible amount they could collect even if they win a judgement against you.
• If the court is aware the debt is past the Limitation Period (in Ontario, over two years since the last activity date), the court will not grant a judgement.

So when the threat of a lawsuit doesn’t work, the next step is for a debt collector to threaten you with a bankruptcy proceeding.

The debt owing, in this case, was an old Rogers Wireless bill.  The person who forwarded this email to me thinks the debt was ten years old; he had forgotten about it, hasn’t heard from them in years, and the debt doesn’t appear on his credit report (because it’s so old).  It seems that Rogers had sold the debt to a debt buyer, and it was the debt buyer who is now trying to collect.  The collection agent knows the debt is old and small, so the only threat they have left is the threat of being declared bankrupt.

This threat to petition someone into involuntary bankruptcy is a collection tactic, nothing more.

Involuntary bankruptcy – more for corporations than individuals

But is it possible to force someone into bankruptcy, as the collection agent suggests?

How often does this happen in real life?

If you are a corporation that has many millions of dollars in debt, it happens occasionally.

But, in my over three decades doing insolvency work, I don’t recall a single time where a creditor has petitioned a person into bankruptcy. I’m sure it’s happened. It’s just extremely rare for a creditor or debt collector to force someone into personal bankruptcy.

Why?  Because whenever the court is involved, lawyers are involved, and lawyers cost money.

I asked one of the most senior insolvency lawyers in Canada what it would cost in legal fees to file a bankruptcy petition in bankruptcy court. He said the minimum cost to petition a debtor into bankruptcy would be $5,000.  Why so expensive?  Because the lawyer is required to notify all interested parties (including the debtor and the Office of the Superintendent of Bankruptcy) and prepare documents to convince the judge that an act of bankruptcy has occurred.

The bankruptcy court takes these applications very seriously because the court does not want the bankruptcy process to be used for normal collection activity.  If a collection agency wants to get the court involved, the proper venue is Small Claims Court for debts of $35,000 or less (in Ontario) or Superior Court for larger debts.

The lawyer or applicant would also have to find a Licensed Insolvency Trustee willing to act in the petition.

So what are the chances that the collection agency will spend $5,000 in legal fees to collect a small debt?

There’s no chance; it’s a silly business decision.

Should you make a voluntary assignment or ignore the notice?

So, what should you do if you get one of these emails?

First, confirm that the debt is real.  If you don’t owe the debt, don’t pay it.  Often collection letters are sent to someone with a similar name to the actual debtor, or perhaps you already paid the debt.  If so, send proof to the collector that you don’t owe the debt.

If you do owe the debt, determine how old the debt is.  If the debt is past the limitation period, it is highly unlikely that the collector will commence legal action.  If the debt doesn’t show up on your credit report, you could ignore it.

If the debt is within the limitation period or harms your credit score, you have options.

If this is your only debt, you can work out a plan directly with the collection agent.  They may be willing to accept less than the full amount if you pay it in full.  You must get a written confirmation of the deal before you send them any money.

If you have other debts, paying this one debt may cause it to be reported as “paid” on your credit report, which then alerts all of your other creditors that you have money and are paying debts, which may lead to a flood of collection calls.

If you can’t pay your bills, this may not be your only collection action. If you have significant debts, I suggest you talk to a Licensed Insolvency Trustee to review possible debt relief options.

A consumer proposal can help you make a plan to deal with all of your debts. If you don’t have enough income to support a consumer proposal, you may want to assign yourself into bankruptcy voluntarily as a last resort. You want to file bankruptcy if you need protection from your creditors. A false threat is not something you need to worry about, however.

Receiving an email like this is very stressful, but if you understand the process and know your options, you can make a plan to deal with all of your debts and get a fresh start.

The post Can A Debt Collector Force You Into Involuntary Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

Other creditors also have a legal right of offset, including the Canada Revenue Agency. In this post, I explain what the right of offset is, who can use this for collection or debt recovery, and what you can do about it.

Understanding setoff provisions

In law, set-off is a legal technique where any creditor can net monies owing between the two same parties.  

In banking, the “right of offset” (or right of set-off as it’s sometimes called) gives institutions the power to take money from your bank account to offset against any debt you owe to them. When you borrow from your bank, you owe them a debt. When you deposit money in your bank account, they owe you that money back. The bank can net these balances if you fall behind on your loan payments.

It is within your financial institution’s rights to access any money in your bank account to pay a delinquent account and:

• they do not need a court order, 
• they do not have to notify you ahead of time,
• they do not need your permission, and
• money can be taken from your checking, savings, or investment account.

Most financial institutions will have a clause in their account, loan and credit card agreements with terms and conditions letting you know what the right of offset in banking policy is and when they enforce it. For example, TD bank’s offset clause states, “We may debit a positive balance in your Account to repay any debt, obligation, or liability that you owe to any TD Bank Group member (called right of set-off).”

How much can a bank take?

Most credit unions and banks have the right to offset and can exercise this right at their discretion, and as many times as they need to.

Your bank can take as much money as is in your account, up to the amount of the debt owing. There is no obligation for the bank to leave any funds in your account if you owe more than is on deposit with them. If more money is deposited in your account later, for example, your next paycheque, they can scoop that money as soon as it arrives as many times as they need to until the debt is paid in full.

Having money withdrawn from your account can leave you short for other bill payments causing further NSF charges, missed payments and further financial hardship.

Can the right of offset be used with joint accounts?

 In general, a right of offset can only apply if:

• You owe money on your own, or you and a third party owe the debt (a joint debt)
• You hold the account with the same bank

Sometimes the right of offset can be used with a joint bank account according to the terms of your account agreement. For example, the same TD account agreement gives them to right to set-off debts you owe them even if “One or more joint Account holders owe the debt, obligation, or liability, whether alone or together with a third party”.

This whole concept of joint debts vs joint accounts gets complicated. Let’s look at a few examples. In all cases you owe and have an account at the same bank.

In other words, if you owe the debt and you and your spouse have a joint account at the same bank, TD can take money for your debt from your joint bank account.

What other creditors have the right of offset?

Third-party creditors

Generally, the right to set off balances cannot be used if the debt is with a third party (some other creditor) to collect from your bank account. The right of set-off means that the debt and account are between the same two parties.

For other creditors or debt collectors to take money from your bank account, they must first go to court to get a formal garnishment order or request to freeze your bank account.

For example, if you owe money to Rogers, they cannot ask the bank to withdraw money from your account without taking legal action to obtain a judgement and then getting a court order to freeze your account. This is rarely done for small debts but may be done by large creditors.

If your bank receives an order from a judge allowing a creditor or debt collector to garnish your bank account based on an unpaid debt you owe, the bank must collect that money. The bank will garnish the money from your account and send it to the court-ordered collector. The bank does not have to tell you about the pending garnishment ahead of time.

Canada Revenue Agency

The CRA has two strong powers around collection and set-off.

First, CRA can freeze your bank account without a court order. This is not the same as a right of offset but certainly has the same effect of limiting your access to funds.

Second, the Canadian government has a statutory right of offset that allows them to withhold money due to you from one government agency to repay monies owing to another agency.  For example, CRA can keep your tax refund or HST credits to reduce payments you owe them for tax debts or Canada Student Loans.

What is the solution & can you avoid having money taken from your account?

If the bank or CRA uses their set-off rights to collect on a debt, it is a strong warning sign that you are experiencing financial problems. A bank exercises the right of offset when a customer depositor doesn’t repay a debt due to the bank. While they do not need to notify you when they intend to withdraw money from your bank account, they have likely previously sent demand notices to pay or have made collection calls.

The first and most common solution is to switch your bank account over to another bank that is not holding your debt instrument. Move to a bank that you don’t have a debt with, or they too will be able to apply their right of offset. This is why it’s recommended that you bank at more than one bank.

While this will stop the withdrawals from your account, it does not deal with the underlying debt problem. Depending on the amount of debt you owe and your ability to repay, you may want to consider formal debt relief options, including:

• Debt management plan
• Consumer proposal
• Personal bankruptcy

Only a consumer proposal or bankruptcy will provide you with creditor protection from further collection actions.

If you would like some advice regarding dealing with collection calls or creditor enforcement, including a right of offset, book a free consultation with one of our debt experts.

The post What Is the Right of Offset and What Can You Do About It? appeared first on Hoyes, Michalos & Associates Inc..