If you are receiving collection calls, it’s essential to understand your rights when dealing with a collection agency. In this guide to debt collection laws in Ontario, we explain the rules a debt collector must follow when contacting you, and when you may be better off not paying a debt collector.

How debt collection laws work in Ontario

If you are unable to pay back a debt, the company you owe money to may send the outstanding debt to a collection agency. A collection agency is a company that creditors hire to recover debts that are past due. Debt collection agencies and debt buyers also purchase debts that are in arrears, so they may be calling you on their behalf rather than for your original creditor.

In Ontario, collection agencies must register and follow the rules set out by the Ontario Collection and Debt Settlement Services Act. Only third-party agencies are subject to these regulations, not your original creditor’s internal collection department. For example, your local plumber can call to collect without being registered. Similarly, if a company purchases an old debt, and calls you because they now own that debt, they also do not need to be registered.

Collection agencies earn a fee paid by your creditor for their collection service, usually a percentage of the amount collected. The objective of a debt collection agency is to collect as much as possible because the more money they receive from you, the more they earn.

Any type of debt can be assigned to a collection agency, including a bank loan, car loan, credit card debt, cell phone bill, utility bill, small business accounts payable, even a judgement debt under a lawsuit.

If you don’t pay off what you owe, collection agencies can become aggressive when it comes to getting back the money. If you don’t pay them, a collection agency can sue you or impose a wage garnishment to pay off the debt.

There are strict laws in Ontario that regulate what a debt collection agency can and cannot do, all designed to control the procedures a debt collector can follow when contacting you or anyone you know.

Initial contact

Collection agents in Ontario can’t just start calling you. Before they call, they are required to send you a letter by snail mail or email which must contain the following information:

• The original creditor who held the debt
• How much you owe
• The type of credit (for example, credit card debt or car loan)
• The amount of debt on the date it was first due, and, if different, the current amount owing
• The name of the debt collection agency, including their contact information
• Confirmation that the collection agency is registered in Ontario
• A statement that the collection agency will provide a detailed breakdown of the current amount owing if requested
• A consumer disclosure statement providing information about your rights and how to file a complaint if you feel the collection agency has broken the law.

There is then a 6-day waiting period before they can call to collect the debt that you owe.

If you do receive a letter or email, we suggest debtors do not rush to contact the collection agency. During the 6-day waiting period, the collection agency is not actively doing anything on the account. This period gives you time to collect your thoughts and determine what options you may have.

If you have not received the written notice, the collection agency or collector must resend the notice to you at the address you provide and no demand for payment or another attempt to collect payment of the debt can be made until the sixth day after the day the notice is resent.

If a collection agency calls you and you have not received a letter they are only permitted to confirm your identity, advise you that they will send details of the debt to you and advise you that they will contact you again 6 days after they have mailed the letter to you. They are prohibited from discussing the debtor demanding payment until they have sent the letter and waited the 6 days unless the consumer invites or authorizes the agency to discuss the debt.

What can collection agents do and not do

Calls from debt collectors can leave you feeling stressed. That’s normal. Ontario debt collection regulations ensure that debt collector tactics do not cross the line into harassment and intimidation.

Under the Collection and Debt Settlement Act an agency cannot threaten legal action in communication with a debtor without the prior written authorization of the original creditor.

Some collection agencies send out “Draft Statement of Claims” that appear they have been issued by the court. This is against Ontario regulations. In almost all cases there is print somewhere on the document that stated “Draft”.  We recommend you photocopy this letter and send it to the Ontario regulator at Consumer Protection Ontario and as well to the Law Society under complaints.

Debt collectors can sue you but applying to the court is costly which is why collection agencies rarely commence legal action. If you do not have a source of verifiable income or a home, they will most likely not pursue you through the courts. Also, government cheques such as Ontario Disability Support Program, Ontario Works or Canada Pension cannot be seized by a collection agency.

How often can debt collectors call you?

Debt collectors in Ontario are permitted to contact you between the hours of 7 am and 9 pm Monday to Saturday and 1 pm and 5 pm on Sunday and cannot contact you on statutory holidays.

After you speak to an agent for the first time, debt collectors can only contact you a maximum of three times in seven days without your express consent for more frequent contact. However, the debt collector must speak to you on the phone, leave a voicemail or send an email for it to count as proper contact. If you don’t answer and they do not leave a message, they may use a robo-dialer to call your number over and over again.

While they can be persistent, any discussion must be civil. They are not allowed to threaten you or use unreasonable or offensive language.

Cell phone communication

It is not uncommon today for someone to only use a cell phone for communication. Unfortunately, this can come with data and calling charges. If you notify a collection agency or collector that a particular method of communication causes you to incur costs, or if the collection agency or collector otherwise becomes aware of that fact, the collection agency or collector cannot continue to contact or attempt to contact you using that method of communication. You are under no obligation to prove that a cost is incurred to stop communication this way. The collection agency is required to reimburse you for any costs if you request repayment and provide proof.

Who else can they contact?

A debt collector can lawfully contact your friends, family, spouse or neighbour in Ontario, but only to find your contact details or if you have given permission in writing or the person has guaranteed payment of your debt. It is very common for creditors and debt collectors to demand payment from cosigners.

A debt collector can contact your employer without your permission to confirm your employment status. They can also call to inquire about the status of a court order for a wage garnishment, which requires automatic deductions from your salary.

How much can they ask you to pay?

You are only required to pay up to the actual amount of debt owing. Debt collection agencies in Ontario are not allowed to charge you any extra fees. There is an exception for Provincial Offences fines owing to municipalities. Collection agencies can add a fee where the municipality permits.

If you ask, the debt collector must also provide a breakdown of the current amount owing. For example, you can ask how much the original loan amount was, how much of the balance is interest, the interest rate, fees, penalties and costs. This is essential information to ask if you are thinking about offering a debt settlement amount. I’ll discuss more on offering less than you owe to a debt collector later in this article.

Debt collector vs debt settlement consultant

A 2015 change to Ontario’s debt collection laws required debt settlement companies to register as debt collectors. While they must register under the same Act, debt settlement companies are not debt collectors. A debt collector works on behalf of the creditor. A for-profit debt settlement company helps you negotiate a debt settlement agreement with a creditor to pay less than you owe.

Debt settlement companies are allowed to charge you a maximum of 15% of each payment plus a one-time fee of $50 per account for the services they provide to you. While debt settlement agencies can no longer charge debtors a hefty up-front fee like they used to, there’s still no guarantee that the average indebted consumer will be safe from predatory debt settlement practices.

To clarify, a Licensed Insolvency Trustee is not required to register provincially as a debt collector. LITs are licensed and registered through the federal government. We cannot charge any additional fees for services other than the prescribed fees permitted under the Bankruptcy & Insolvency Act. These fees are taken out of your consumer proposal or bankruptcy payments, before payments to creditors.

The time limit for debt collection in Ontario

In Ontario, the statute of limitations for standard debts, like bank loans and credit cards, is two years. After this time, a collection agency can no longer sue you or pursue legal action to collect on a past-due debt. Be careful not to acknowledge the debt when talking to a debt collector as this can start the two-year clock over again. The courts have been clear on this issue. The 2-year limitation is restricted to the date of last payment.

Dodging your debt might seem like a great plan, but even if two years have passed, it does not mean the debt will vanish. You still owe the money, and debt collectors can continue to contact you for payment even if they can no longer sue.

Running away from your debts will also negatively affect your credit report and credit score for much longer. Late payments, defaults and accounts in collection remain on your credit report for six to seven years (depending on the credit bureau) from the date of your last payment.

The two-year limitation period applies to unsecured debts. Secured creditors (like mortgage and car loan lenders) can enforce their security rights at any time, and the prescribed limitation period in the Income Tax Act in Canada for Canada Revenue collections is ten years.

Dealing with a collection agency

Debt collectors can be intimidating, and repeatedly receiving calls from a collection agent can almost feel like harassment. Unfortunately, you can’t just shut your eyes and wish the calls away.

If the debt is yours, before you talk with the debt collector, you have some decisions to make:

• Can you afford to pay back your debt in full?
• Can you afford a partial payment or settlement?
• Should you pay the debt collector or talk to a credit counsellor or Licensed Insolvency Trustee first?

If you are in a financial position to make payments on the debt we suggest that you attempt to negotiate a payment arrangement with the collection agency. You can offer to pay the amount at once or in installments. Whatever you do:

• Only offer what you can afford
• Get any agreement in writing
• Never send cash or gift cards as payment

If you negotiate a payment plan with a collection agency you should, as part of the agreement, have them in writing acknowledge that if payments are made on time they will remove the collection item on your credit report once the debt has been paid in full.

You can read more tips and tricks on dealing with collection agents here.

If you can’t afford to repay the debt, tell that to the collection agent and explain why, but don’t be bullied into making a partial payment that doesn’t fully solve your debt problems.

Reasons to not pay a collection agency

It’s only a good idea to pay a collection agency if it’s in your own best interest. If your debt is small and affordable, and you just want to clean up your credit score or stop the calls, then pay it. However, there are reasons not to pay a collection agency.

The credit bureau purge policy – As mentioned, collections accounts, whether paid or unpaid, remain on your credit report for six years from the last payment. Once this time is up, a debt will be automatically purged and will no longer appear on your credit report for future lenders to see.

Making a payment to a collection agency can start this clock over. If you are close to the end of the purge window and it’s a small debt that you are unlikely to be sued for, you might be better off ignoring the calls and not paying the collection agency.

We recommend you get a free copy of your credit report to check your date of last payment. Some less reputable collection agencies and debt purchases may knowingly report an account in collection on a credit report well beyond the 6-year purge period. They do so to force the consumer to contact the credit bureau to have the item removed or to offer a settlement.

If it’s an old debt – This is similar to the purge policy. If a debt is past the limitation period where a collection agent can no longer sue you, and you can live with the hit on your credit, you can ignore the calls and you can choose not to pay and move on.

If you have ‘too much’ debt – If the debt is too large or multiple collections agents are calling you because you have too much debt, it’s better to make a plan for all your debts and not try to deal separately with several different collection agents. This is where a consumer proposal or personal bankruptcy might work for you and stop the collection calls altogether.

Options for settling with a collection agency

Sometimes you can negotiate a deal with a debt collector yourself.

It’s very important to do this carefully and make sure that when you settle with a collection agency, your settlement has legal validity. You need to feel confident enough to approach your debt collectors and be aware of your rights. 

If you believe in your persuasion skills, your creditors may agree to settle for pennies on the dollar. If your debt is old and in collections, you stand a better chance at negotiating a good settlement amount.

A successful negotiation with a collection agency involves many steps:

1. Determine how much you can afford to repay
2. Rehearse your ‘story’
3. Be aware of your rights and the legality of your settlement
4. Stay composed and do not be afraid to hang up if things get nasty
5. Write everything down as you go so you remember what both sides said
6. Get the final agreement sent to you in writing
7. Make sure you can 100% keep up with your repayments, or else all your hard work could be undone

While it is feasible to negotiate and settle with your creditors, debt collectors or a collection agency on your own, this doesn’t mean it’s the best option.

Alternatives in Ontario to dealing with collection agencies

You can decide not to pay your debt at all, but for a lot of people, that’s too stressful. The lender or creditor may decide to pursue legal options, like a wage garnishment, or you may be tired of juggling one debt payment for another.

You want to get out of debt and learn how to manage your debts and get your finances back on track. If you are in debt but want to avoid dealing with a collection agency, you can:

• Arrange a Debt Management Plan – With the help of a not-for-profit credit counselling service or agency, you can arrange a DMP. This means that if you have the money, and you want to clear your debt up, you offer to pay the debt in full over a period of time (usually years) by way of monthly payments. A credit counselling agency will charge you a 10% fee on top of the amount owing.
• File for a Consumer Proposal – If you don’t have the funds in full, there are still alternatives to a partial payment with a collection agency. A consumer proposal is a legally binding debt settlement agreement to repay your creditors a percentage of what you owe in exchange for full debt forgiveness. A Licensed Insolvency Trustee helps you negotiate a settlement offer and their fees come out of the amount paid to creditors. You pay only the agreed settlement amount.
• File for Personal Bankruptcy – Sometimes, declaring bankruptcy is the best way to deal with your debt and get debt relief. Personal bankruptcy is a legal practice designed to help an honest but unfortunate debtor who cannot afford to repay their debts. Debtors assign their rights to non-exempt assets for the benefit of their creditors in exchange for which they are released from unsecured debts. At the end of the bankruptcy, your debts are legally discharged, meaning you are no longer required to pay them back, and you can have a ‘fresh start’.

At Hoyes, Michalos and Associates, we are proud to be a team of understanding experts, trained in all of the different Ontario debt relief options.

Meet with a licensed insolvency trustee who will ask you all the important questions about your income, budget and debts to help you plan for the best outcome.

If you want a team of professionals to deal with your debts for you, who understand all there is to know about Ontario debt collection laws and how to stop debt collection calls for good, then all you need to do is give us a call or send us an email, and we can get started.

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Legality of a consumer proposal

A consumer proposal is a process under the Bankruptcy & Insolvency Act (BIA Act). Once filed with a Licensed Insolvency Trustee, all parties – debtors, creditors and your trustee – are bound by the provisions of the BIA Act.  The Act contains all the rules and regulations governing consumer proposals in Canada and everyone’s rights in a proposal.

Filing for a stay of proceedings

The first legal act is the formal filing of your proposal documents. As soon as your proposal documents are e-filed with the federal government, you receive what is called a legal stay of proceedings. This stay provides you with immediate protection from further creditor actions. This means any pending lawsuits are put on hold, wage garnishments stop, you can even tell creditors to stop calling you as you have filed a proposal.

Only unsecured creditors are bound by a proposal

A consumer proposal deals with unsecured creditors only. Secured debts, like your mortgage or car loan, are not included in a proposal to creditors. Generally, this is a good thing. If you continue to meet your monthly payments on your secured loan, your lender is unlikely to take any action which means your mortgage or car loan is not affected by filing a consumer proposal. If, however, you miss payments, your secured lender still has the right to seize the asset provided as collateral.

When is a consumer proposal legally accepted?

After your proposal is filed, your trustee will mail a copy of your offer to all your creditors for their consideration. Your creditors have 45 days to file ‘claims’ and vote for or against your proposal and may ask for a creditors’ meeting to review or discuss the terms further.  If less than 25% ask for a creditors’ meeting the proposal is deemed accepted.  If 25% ask for a creditor’s meeting, and at the meeting the majority of your creditors by dollar value agree to the proposal, it is legally accepted.

Once accepted the proposal is binding on all unsecured creditors.

If your proposal is deemed accepted by these voting conditions, even those creditors who voted no are bound by the terms of your agreement.

This is one of the biggest advantages of a consumer proposal if you are struggling with multiple creditors. You do not need to arrange a separate deal with each creditor.  If the majority of your debts vote in favour, your proposal will pass.

This means that your trustee, when helping you craft a successful offer to your creditors, will take into account how many creditors you have, the size of their individual claims for debts you owe and who may have sufficient voting weight to influence the outcome of voting. The objective is to make an offer that is enough to get the majority to agree but does not have to ensure everyone agrees.  If you are concerned about one angry creditor, as long as they are not large enough to be a majority creditor, you should not need to worry.

To get a legally binding debt settlement of your debts, contact a Licensed Insolvency Trustee for a free consultation.

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As we witnessed in two prominent corporate bankruptcies with underfunded pensions in Canada – Nortel in 2009 and Sears Canada in 2017 – over 40,000 pensioners across the country were left to live on much less than they anticipated. These cases highlighted the vulnerability of defined benefit pension programs and the unfortunate costs faced by senior employees.

The question becomes then, should full pension payouts be made a priority in a corporate bankruptcy? If so, what would this mean? And would pension protection cause any unintended negative consequences?

Below I explain where pensions stand in a corporate bankruptcy, potential issues with pension protection, and what lawmakers should do instead. And as an employee relying on a defined benefit pension, I share advice for how you can protect yourself from an employer bankruptcy.

Corporate Bankruptcy Process and Its Impact on Pensions

In a corporate bankruptcy, it’s the Licensed Insolvency Trustee’s job to recover as much cash as possible for creditors. This is achieved by seizing and selling assets owned by the company, along with inventory and equipment.

After everything is sold off, the Trustee is left with a pot of cash to distribute to a list of prioritized creditors, and at the top of the list are government claims for debts like unpaid HST and source deductions and secured creditors like banks. If there is any money left after paying the claims of those first in line, employees can file a claim for unpaid wages up to a maximum of $2,000 or six-months wages, whichever is left, as a preferred claim ahead of general creditors.

Pensioners fall to the bottom of the list of creditors to be paid. They stand in line to receive a pro-rated portion of any dividends paid to all unsecured creditors. Typically, there is not enough assets or money available when a company files bankruptcy to repay unsecured creditors. At most they will receive a few pennies on the dollar for any claims filed. If there is an existing underfunded pension, this leaves retirees of a bankrupt company with an income shortfall.  

The Province of Ontario, however, does have a Pension Benefits Guarantee Fund (PBGF), which acts as insurance, guaranteeing private sector pensions up to $1,000 a month under certain circumstances. But beyond this protection for one province, there are no laws in Canada obligating corporations to ensure their pensions are fully funded in a bankruptcy.

Should Pensions Be Protected?

Given the issues pension recipients face when their employer goes bankrupt, many critics are calling for the law to change to make pension recipients a super-priority. I don’t disagree with the sentiment. Of course, individuals who have worked hard for many years should receive what they were promised. These employees were paid less per hour when they were working in exchange for an agreement by their employer to fund their pension. An unfunded pension obligation is a promise broken. When you’re nearing the age of retirement or in retirement, working a new job isn’t ideal. So not providing some protection for pensions in the case of bankruptcy affects a very vulnerable group.

But while pension protection sounds like a good solution, there are two problems that can arise from enacting legislation to put pension claims ahead of all other creditors in a bankruptcy.

Banks Enforce Tighter Lending Rules; Private Companies Struggle to Operate

First, banks lend against the value of a company’s assets, up to a certain percentage, usually 75% to 80%. Should a law be enacted whereby pension obligations become a priority ahead of secured creditors, then that’s one more item a bank would need to consider before lending to a company. If there is a shortfall in the value of assets a company can use to secure loans, banks will tighten lending.

Why is this a concern?

The real issue is that pension funds are often large, and they are also not always 100% funded, even when the company is performing well overall. As pension contributions are gathered from the employer and employee and then pooled and invested, there is a risk given market volatility that invested funds could suffer a loss.

If the company doesn’t have the cash on hand to top up the shortfall in the pension, there’s a high chance banks won’t lend to the company because one of its biggest obligations is not fully funded. Without bank loans, a company is likely to struggle to operate as it would be short on cash. Not being able to operate would cause problems for the future of the company.

Private Companies May Refuse to Provide Pension Benefits

The second unintended consequence of making pension shortfalls a super-priority in a bankruptcy is that the obligation to have a pension funded at all times may be too onerous or complicated for companies which may result in their refusal to provide a pension plan altogether. This would adversely affect employees who would otherwise have no other means to save money for retirement. We see this trend already as more employers move to a simple defined-contribution or RRSP matching program.

What Lawmakers Should Do Instead

Rather than requiring companies to have fully-funded pensions at all times, lawmakers should instead make it illegal for shareholders to strip a company of its cash in the form of dividends when there is a pension shortfall.  

Consider what happened to Sears Canada: Its majority shareholder, an American hedge fund, took out billions in cash from the company to put into its own pocket. In 2005, the hedge fund took out $1.5 billion; in 2010, $750 million; in 2012, $100 million. However, in 2007, there was already a pension shortfall of $36 million and that shortfall continued to widen, reaching $267 million by 2015.

There would have been more than enough cash available to Sears Canada to cover its $36 million pension shortfall in 2007 and any other future shortfall, if cash weren’t being withdrawn from the company at a challenging time.

Implementing rules to prohibit shareholder greed and dividend stripping when a pension is in a shortfall is likely to be a much more effective tool for pension protection, as it would allow a company access to more cash to cover its losses.  

Protecting Yourself as an Employee

After reading this, you may feel concerned as an employee of a private company that offers a defined benefit pension plan. There are 3 things you can proactively check as an employee to avoid financial surprises:

1. Annual Pension Statements. You should be receiving annual pension statements from your employer. Look at its transfer ratio. A ratio of 100% or higher indicates that the plan’s assets would cover its obligations if the plan were terminated. A ratio of less than 100% would indicate there could be a shortfall but know that the transfer ratio can change over time.
2. Contact Plan Regulators. If you don’t receive an annual statement, you can contact the regulator looking after your plan – either the Financial Services Commission of Ontario (FSCO) or the federal Office of the Superintendent of Financial Institutions (OSFI) to check if there is a funding deficit. These regulators can also tell you if your employer is making extra payments to cover funding gaps.
3. The Health of Your Company. Your pension funding status isn’t the only aspect that matters. You should also be aware of how your employer is performing. Are there hiring freezes? Are workers facing lay-offs? Get a sense of financial difficulties in your company.

Remember Your Own Financial Situation Too

Even if your pension is secured, you should remember that pension income will always be less than what you are currently making (often 50% to 80%) as an employed individual. So, another way to protect your financial situation – beyond looking at funding deficits and your employer – is to look at your own spending habits. Plan ahead and make sure you can live off of less money than you’re currently bringing home each month. Take a look at your monthly expenses. Do you have any debts – whether secured like a mortgage or unsecured credit cards? Will they be paid off by the time you retire? If not, could you manage to pay your bills on the lower pension income?

Being aware of the health of your pension, employer, and your own finances can allow you to better plan your financial priorities and avoid money problems.

Is Defined Benefit Pension the Same as Defined Contribution?

These days, defined benefit pension plans are often only seen with large and older private companies or the government. With government jobs, pensions are often safer than in the private sector because they can rely on taxpayers for funding.  

But among newer private companies, they offer defined contribution pensions like Registered Retirement Savings Plans (RRSPs). Company RRSPs are much easier to administer and face little risk of loss in a private corporate bankruptcy. This is because in company RRSPs, you make contributions and they’re held in your name with an external fund manager. Your employer may match your contributions up to a certain percentage, but the fund is ultimately not dependent on your employer.

Nevertheless, for older employees who gave their best years to an employer and were promised stable income in retirement to have to lose most of that income, is really tragic. My fear though is if we make pensions a priority in a bankruptcy, that will cause worse problems for employees – their employer could go out of business much sooner or their employer could simply stop pension benefits altogether. Neither scenario helps the employee at the end of the day, but where I believe there needs to be stricter control is what goes into the shareholder’s pocket when there is a pension deficit.

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I outline what happens when a collection agency takes you to court and what you can do to stop the court proceedings and stop collection actions.

How debt collectors obtain files

There are two ways debt collection agencies obtain accounts of unpaid debt – either through assignments or they buy files.

Assignment of a debt means that a lender, like a bank or credit card company, has hired the collection agency to collect money on delinquent debts. In assignments, the collection agencies receive a commission, usually 30% of the debt they were able to collect on behalf of the bank.

Another way a debt collection agency can obtain unpaid debt accounts is by buying them. Lenders that are no longer trying to collect a debt will sell their debt accounts to a collection agency willing to buy them. The collection agency will then own the debt and begin contacting the debtor to recover money. This is often the case for very old debts which can explain why you may be receiving calls and collection demands from a debt collector after years of no contact.

Will a collection agency take me to court?

A collection agency is a business. Suing you will cost money on lawyers and involve time spent on paperwork, so it must be worthwhile for the debt collector to take you to court. Whether a debt collector will sue you ultimately depends on whether you have assets or earn a good income.

Read Transcript

There are a few reasons why a collection agency will only threaten to sue, but not follow-through on taking real legal action:

1. Your debt is too small. Most large creditors will avoid lawsuits where an unpaid debt is below a certain dollar amount. The reason being they don’t think it’s cost-effective to go after a loan of only a few hundred dollars when they will be spending that amount on the legal action alone.
2. You are considered creditor proof. If you don’t own any assets or you do not have income that can be garnisheed, it’s not possible for debt collector to recover any monies from you even if they take you to court.
3. You live outside of Canada. If you owe money to a Canadian creditor, it’s highly unlikely that you will be sued while living abroad, even if you still receive phone calls from Canada. The primary reason for this is that your creditor would have had to first sue you in Canada and then have to bring the lawsuit over to your current country of residence. As this can be a complicated process, Canadian creditors generally don’t sue you if you live in another country.
4. Your debt is too old. Technically debt obligations never expire, and debt collectors can attempt to collect the debt for as long as they want. However, every province in Canada has a statute of limitations on most unsecured debts which prevents creditors and debt collectors from successfully taking legal action after a specific amount of time has passed. This is sometimes also called time-barred debt because it is no longer legally collectible after a certain number of years have passed. In Ontario, the statute of limitations is two years. If a creditor does sue you after the two-year period, you can file a Statement of Defense saying the debt is past the limitations period.

So how often do debt collectors take people to court?  Rarely. The debt collector will only sue you through the courts if they expect to collect more in fees than they will incur in legal and court costs.

What happens during the court process for debt collection?

The debt collection process for late payments generally follows three stages.

Initial collection attempts

In stage one, your creditor or collection agency will attempt to contact you to arrange a new payment plan. If your account has been transferred or sold to a collection agency, they must first send you a written notice indicating what agency they work for, the name of the original creditor, account number, when the account was transferred and the amount you owe.  Five days after sending this notification they are legally allowed to call you. The longer your account is overdue, the more aggressive you can expect creditor calls and letters to become.

Court proceeding & defense

If a creditor or collection agency decides to pursue you financially through the court system, they will send you a notice of legal action or statement of claim.  You have 21 days from the time this claim is mailed to dispute a debt or accept the claim.

If you do not respond with a Statement of Defense within this time period or attend the trial, the court will likely rule in favor of the creditor.

If you do owe the specified debt and do not present an appropriate defense, the judge will likely sign a Judgement Order.  This is an order indicating that the court acknowledges the debt is legally owed by you and gives the judgment creditor the legal right to pursue other means of collection.

Pursuing legal recovery options

If the collection agency wins the case and receives a default judgment against you, they will take steps to recover the debt including:

• Request that the court to issue a garnishment order so they can garnish your wages;
• Freeze your bank account and issue a demand to your bank that any monies deposited in your account be directed to them.
• Obtain a Write of Execution allowing them to seize non-exempt property which they will sell to repay the debt. It is even possible for unsecured creditors to attempt to seize your car for an unpaid debt.
• File a lien on your property which will remain and must be settled prior to any sale.

What do I do if I have a judgment against me?

Make a settlement offer or create a repayment plan

If you can afford to pay the money owed, you can still make a settlement arrangement directly with the debt collection agency. Based on your financial situation, you can start with a partial payment then work out a monthly payment plan. Make sure to get all agreements in writing.  If the debt is old, or if the agency has purchased the debt for cents on the dollar, you may be able to make an offer for much less than you owe.

File for consumer creditor protection

If a creditor or debt collector has proceeded to file a lawsuit and obtained a judgment against you, you are likely at the stage where you cannot afford to repay the debt.  You may also have other debts that are causing you financial problems.

You can stop these legal actions by filing a consumer proposal or bankruptcy.

Both options provide a legal stay of proceedings. A stay in bankruptcy or consumer proposal means that unsecured creditors and debt collectors are prohibited from launching or continuing lawsuits. The stay is automatic and happens as soon as you file.

While in many cases a collection agency is only threatening a lawsuit, if your debt is not past the limitations period and you own assets or earn an income, it’s very likely that the debt collector will pursue you in court and obtain a judgment against you. If you’ve received written notice of a court application, act before facing garnishment, a bank account freeze, or a lien on your property.

Contact us today to meet with an experienced trustee who will take the time to review your debt situation and explain all of your options to stop any collection actions and deal with your debt. Your first consultation is always free.

Tune in to the podcast episode below.

Transcript

Doug:                We’ve had a lot of long shows recently so today we’re back for a quick Technical Tidbits Edition of Debt Free in 30 where we answer one question from our listeners. Today’s question, can a collection agency take me to court? Pretty simple, so Ted Michalos, my Hoyes Michalos co-founder and business partner is here. So Ted, to start is being sued by a collection agency something to worry about?

Ted:                  Right. So I’m going to describe it as they have the legal right to do it but it’s not something they do very often. So it’s a question about perception versus reality, what do they do in practice versus what are they going to threaten you with in their cover letters or emails.

Doug:                So you talk about threatening. How often have you had a client sitting in front of you who’s said I’m getting these calls from a collection agency and they’re going to take me to court?

Ted:                  What time is it?

Doug:                Yeah, exactly, right. All the time it’s a very common thing.

Ted:                  Anyone who’s dealing any way with collection agency’s it’s the most common thing they do. You’ve got to pay me by Friday or I’m taking you to court.

Doug:                Okay, so let’s start with the basics here then because I think once everyone understand how a collection agencies work the answer to this question is pretty easy to understand. So there are two ways that collection agencies get debts to collect, they’re either assigned them or they buy them. So what’s the most common of those two scenarios?

Ted:                  So the most common one is the assignment. And what that means folks is that a company, a big bank, a utility, whomever it is, hires the collection agency to do the dirty work for them. So the Royal Bank doesn’t want to be calling you trying to collect your debts, they don’t want to hassle you but they would like their money back. So they will assign the debt to a collection agency that’s working on commission to try and recover the money.

Doug:                That’s working on commission, so that’s how it works then.

Ted:                  Right. Well and a critical component of that is so they only get paid if they collect some money. And so the decision for them well, do they take you to court? Well they certainly threaten it but unless they’re certain that they’re going to get paid or the bank is authorized them to spend the money they’re not likely to do it.

Doug:                So let’s talk through the sequence here. I’ve got a credit card with a big bank and something happens that I’m not able to pay it. So, the first month I miss my payment there’s going to be a note on the statement that says hey, you probably forgot to make a payment.

Ted:                  It’s a polite reminder the first time.

Doug:                A polite reminder, no big deal.

Ted:                  Unless it’s a US credit card then it’s less polite.

Doug:                Okay, so then the second month I’ve missed a payment it’s much less polite, it’s a more forceful –

Ted:                  Usually the second month there is an individual letter or notice and possibly there’s a phone call even from Canadian banks.

Doug:                And by the third month okay they’ve –

Ted:                  Now the third month they’re losing patience with you. And they’ve got to decide do we continue to contact you, which is bad for our business relationship or do we hire somebody else to be the nuance?

Doug:                And so very common that around month three, four, five six, they make the decision you know what, this isn’t salvageable we’re sending you to a collection agent.

Ted:                  Yep and they’re tax implications for them too, right? Now they’ve sent it off to collections, it’s now doubtful, there’s a basis for them sending some of this off for their taxes, even if you do pay them, it’s an accounting thing but there are reasons for doing it.

Doug:                So somewhere let’s day it’s month four, five or six, I get contacted by a collection agency so that would be what we call the first hand off and that collection agency is dealing with a warm body, you were current up to a few months ago so the commission they’re going to earn it’s not a huge commission because it’s a relatively simple debt to collect, so I don’t know what they get, I’m not privy to this but maybe it’s a 10%, 20%, 30%.

Ted:                  I think it’s 30.

Doug:                So let’s say it’s a 30% commission. So the collection agency is calling you, they want to collect their money and you said it’s unlikely they will take you to court because of math. They’re only going to get 30% of the money and it costs them something to take you to court.

Ted:                  Yep and they’re not sure that you’re actually going to pay. So I mean there’s some candidates that are better to be taking to court than others. You got a high paying job, they know you’ve got lots of assets or something, but these are people that usually have paid their bills.

Doug:                Right. So, if I’m a collection agency I don’t want to pay the court fee, because to sue someone you got to pay a court fee.

Ted:                  Plus there’s the time of preparing the documents and all that work.

Doug:                Lawyers fees, I probably have to serve you with the documents, so maybe it costs, I don’t know, a couple of hundred bucks, a few hundred bucks, whatever it is, to go the court process. And if I don’t collect I’ve just wasted that money and if I do collect I’m going to get 30% of it because that’s the deal I have with the bank, that’s why collection agencies typically are not going to take you to court.

Ted:                  Right, it’s just not likely.

Doug:                It’s just not likely.

Ted:                  And think it through folks, the courts are already backed up with the collection agencies at most suing, I don’t know, one out of 20 people, I don’t know, I don’t even think it’s that high. So if they sued everybody can you just imagine how long it would take?

Doug:                Well and I think collection agencies when they are collecting on behalf of a bank sue virtually no one. It’s highly unlikely; I think it’s probably more like one in 10 thousand as opposed to it’s a small number. Now there’s a second scenario though and that is where an agency has purchased your debt.

Ted:                  And this is more common than you might think but they’re always blocks of old accounts. So I’ll give you an example, Canadian Tire every month will put together a block of old accounts, things that they’ve given up on, and they sell them for what, three, four cents on the dollar? They get companies to big on buying them. And once those companies buy those debts then they have the right to try and collect on them. Now there are some complications under the law for these things but those are the guys that are more likely to sue.

Doug:                Okay, so let’s break that down and we used that company as an example but we’ve seen it pretty much with every company, every bank, every credit card company.

Ted:                  Everybody does it.

Doug:                So they’ve decided you know what, we can’t collect it. So the normal sequence of events would be the original bank, the original credit card company, takes three to four months tries to collect, doesn’t get anywhere, they send it to a collection agency, they don’t get anywhere it comes back. At some point they say you know what, maybe it’s been a year, maybe it’s been two years, we haven’t collected, we don’t think we’re going to collect, let’s see if we can sell it to someone.

                          So a debt buyer comes in and says great, I will take all of your accounts that are between 18 months and two years old or whatever. And we’ll give you three cents on the dollar, four cents, five cents, six cents, whatever it is. So if that happens does that increase the chance that they will sue you?

Ted:                  I think it increases it certainly over the ones that are assigned. I still don’t think there’s a big chance of being sued but it’s bigger than it was under the first scenario. Because now they actually own the debt, they’ve spent some money and so now they’re trying to recover money. In the first one they’re getting paid a commission so they’re not out of pocket yet, the second one they’re out of pocket, they’ve paid for something so they want their money back.

Doug:                And if they’ve paid let’s just say five cents on the dollar for it.

Ted:                  Which would be phenomenal.

Doug:                You know, and they can collect from you and get 100 cents they’ve just made a huge profit.

Ted:                  Correct.

Doug:                And so is it worth it to spend a few hundred bucks on lawyers and lawsuits? I guess that’s a business decisions that they have to make.

Ted:                  And again so they’ve got – there are some people that are more likely to be sued than others. And it kind of depends on your unique situation, if you’re on some sort of assistance or pensions, you’re not a good candidate to get sued if you are earning a decent living, you’re a single adult, much more likely.

Doug:                Yeah. And so what they assume do, and this is all speculation on my part because I don’t work for a collection agency, but what I would assume they do is run credit checks on everybody and go okay, let’s pick people who are a certain age range because if you’re over 80 years old the chances of you having a fulltime job that we can collect on are probably pretty slim. And let’s see if there’s any recent other history do you have other debts that are still current, what kind of job situation do you have? We pick the targets and then we go after those people.

                          Now you and I were just looking at some paperwork before we turned the microphones here of exactly that scenario. It was somebody who’s come in to see us who is getting sued for an old debt.

Ted:                  That’s correct.

Doug:                And we’re not going to mention the name of the company but it was a debt from awhile ago, a debt purchaser bought it and it is now that debt buyer who is suing them.

Ted:                  Trying to recover it, that’s right.

Doug:                Now you said something else a minute ago and that was that sometimes there’s legal complications to all of this, so what were you alluding to there?

Ted:                  There’s something in Ontario, and in every other province, they’ve just got different names, call the Limitations Act. So in Ontario the Limitations Act gives you a defence if you’re being sued and it basically says if you haven’t confirmed the existence of a debt in two years then your defence is you thought the debt was gone, I mean that’s in layman’s terms. Now confirming the debt, most people take that to mean you’ve made a payment but if they’ve got a recording of you saying yes, I know I owe you the money or something in writing, that would classify as a confirmation as well.

Doug:                Yeah, the most obvious scenario is I made a payment on it.

Ted:                  Right.

Doug:                So I wouldn’t be making a payment on it if it wasn’t. I mean talking to someone on the phone –

Ted:                  Well but one of the reasons they all tell you they’re recording calls is because it may very well be that you say yes, I know that I know you, I’m going to give you something by Friday. Okay, now I can use that against you.

Doug:                Yeah and whether they would do that in court or not, I mean we already said that the chances are pretty unlikely. But if a debt buyer has purchased debts from a couple of years ago, and it would make perfect sense for a bank or credit card company to sell them because they know I can’t really take someone to court for them because it’s too old.

Ted:                  I’ve already written them off.

Doug:                I’ve already written them off. So, you know, if I get two cents on the dollar that’s two cents more than I was getting. The debt buyer now though well, hey maybe I’ll take them to court. And so I think with the Limitations Act you spelled it out very clearly, it is a defence.

Ted:                  Correct.

Doug:                So anybody can sue anybody for anything, oh the sun’s shining today, I think I’ll sue you. So the fact that the debt is two years old doesn’t mean I can’t sue you for it.

Ted:                  Yeah, it’s not a statute of limitations saying the debt is gone, it’s saying that the court will not compel collection, that’s a whole different thing.

Doug:                Hugely different.

Ted:                  So it still shows up on your credit bureau, the debt is still there, it’s just that if you put up any kind of defence as in hey, wait a minute it’s been more than two years, the court won’t let them take anything from you.

Doug:                Now of course you have to know there’s a court hearing.

Ted:                  Right, so they’ve got to know how to find you.

Doug:                And so I mean it’s something we’ve seen many times as well where when they go to court and say well, we tried to find the guy but we sent it to his last known address, we don’t know where he is and so of course the court isn’t going to say well how old is this debt, is it passed the two year limitations period?

Ted:                  The court doesn’t care.

Doug:                The court doesn’t care. The court says okay, boom, here you go, here’s your judgment.

Ted:                  And the standards are a lot lower in small claims court, I mean you just hit on it, small claims they’re only required to send notice to the last address of record. That’s debts under $25,000, debts over $25,000 they actually have to serve you. So you’re less likely to be sued for debts – if they’re going to sue you it’ll be in the first two years.

Doug:                And we’re giving you Ontario law here, Ontario Canada as we record this in early 2019 that may be different in whatever jurisdiction you’re in. So, is it more likely you would get sued for a $5,000 debt or a $50,000 debt?

Ted:                  So if you’re going to be sued for a $50,000 debt it will be done within the first two years and it will because the creditor, whoever you owed the money to, assigned it to a law firm, not to a collection agency. If you’ve got a debt in a collection agency for $5,000 and it’s two or three years old, they might sue you, more likely they’re going to ask you to try and settle for a thousand or $1,500.

Doug:                Yeah and sometimes the lawsuit is more of a threat but it’s – if it’s a small enough amount then you’re probably not going to put up as big a defence than if it was a much bigger amount and if you owe –

Ted:                  Well, that’s one of their tricks.

Doug:                That’s the trick exactly.

Ted:                  You owe me $1,500, they’ve actually bought it for $50 but they’ll settle with you for $500, great deal for everybody.

Doug:                Great deal for everybody. So okay, so let’s summarize all this then. With respect to the limitations act in general they’ve got to sue you within two years but you have to actually show up in court and defend if they –

Ted:                  It’s an active defence; it’s not an automatic defence.

Doug:                And one of the ways to defend yourself in that case would be to get a copy of your credit report, which shows the last activity date and you go to court and you say look the last activity date was three years ago judge. Okay, so then the judge would throw it out assuming the judge knows the law, so highly unlikely that a big bank would be suing you after two years. Well, we just looked at a piece of paper of someone who’s being sued for a debt that was purchased two years ago so it’s more likely that that’ll happen. So grand summary then, the question was is it likely that a collection agency will sue you?

Ted:                  So, the question was can a collection agency sue you? Yes, they can but it’s not likely.

Doug:                And so if someone has been contacted by a collection agency who says we’re going to sue you, you owe us all this money, what advice would you be giving that person?

Ted:                  So if you only have the one debt that you’re in trouble with, and most of the people that we talk to, it’s multiple debt so we’re going to give you a different answer in a second, you’ve only got one debt you’re dealing with a collection agency, maybe you take the time to talk to them. Maybe if it’s a one off you can deal with it and probably they’ll settle. Most of the folks we talk to it’s not one, it’s two, it’s three, it’s four, it’s because there’s been a ripple effect. It’s one of those unattended consequences I haven’t been able to pay this bill, I borrowed from that one and so now you’ve got a number of different items in collections.

                          Well so the correct answer here is not to deal with the collection agency, the answer here is to deal with your debt problem, which means well, contacting someone like us. Are you going to file for a consumer proposal, maybe are you going to file for bankruptcy, maybe you just need somebody to help you sort this stuff out.

Doug:                And is your answer different if I’ve already been sued?

Ted:                  No, I mean if you’ve already been sued – again if only one person has sued you, the risk you run now is you’re going to have your wages garnisheed or your bank account frozen. But if one person has sued you probably someone else is going to make that same decision as well and so you’re already at the point where you should be seeking professional help. And that’s not just me trying to sell my services.

Doug:                Well it’s actually the truth.

Ted:                  You got a tooth ache you go see the dentist, you got a debt problem you go see someone to help you with your debt.

Doug:                So it’s fairly simple then. If you’ve got one collection agency after you and let’s say it’s an old cell phone bill, we see that all the time. So okay, it was originally $500 now they say it’s $1,000 they’re probably not going to take you to court for that but it’s also probably something you can deal with on your own, you talk to them and say look guys, how about I give you $300, let’s make a deal, whatever. And you want to make sure you do it in the right way, get them to send you a letter saying $300 is full and final settlement and all the rest of it.

                          If you have three or four of them and in most cases what they want is a lump sum, they don’t want $50 for the next two years, they want $300 right now. So if you can’t settle with all of them, then, you know.

Ted:                  What’s the point of settling with any of them if you can’t settle with all of them?

Doug:                Yeah and in fact you’d probably make it worse, you now settle with one of them and that reflect on your credit report that you paid it and now all the rest of them know he’s got money and boom you’re getting calls from everyone. So if you have multiple debts and they’re now at the collection agency stage then yes, it’s probably better to look at a bigger picture solution and deal with all of them.

Ted:                  That’s right, it just makes more sense.

Doug:                And a consumer proposal or bankruptcy will stop a lawsuit.

Ted:                  Correct.

Doug:                It will stop – even if you’ve already got a judgement against you.

Ted:                  Yeah there’s something called a stay of proceedings, it’s an automatic provision in the law, so it means that a creditor cannot advance any sort of legal situation further. So if they haven’t started it stops them from actually commencing, if they’ve already started it stops them in their tracks, if they already have a judgment against you, it stops it from being enforceable. If they’re already garnishing your wages, it stops them from garnishing your wages.

Doug:                And that’s a key point because a lot of people think well, they’re already garnishing my wages, nothing I can do now, I wish I dealt with it before it went to court. Well no, it doesn’t matter what stage it is, obviously the sooner you deal with it the better.

Ted:                  And the reasoning is this, they’re stopping that one particular creditor because the assumption is you’ve got multiple creditors. And there’s no reason why that one creditor should be treated better than everybody else.

Doug:                Everyone gets treated the same.

Ted:                  That’s right.

Doug:                Excellent. So there you go, there’s the answer to both will a collection agency sue you and can they sue you?

Ted:                  And what do you do if they’re – if you’re in that kind of situation?

Doug:                Yeah and be proactive, you know, sitting there waiting for it to go away is not the solution. Excellent, Ted thanks very much. That’s our show for today. Thanks for listening, until next week I’m Doug Hoyes, that was Debt Free in 30.

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What is a stay of proceedings?

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People file insolvency to eliminate debt and to stop creditor actions while they do so.

What a bankruptcy “stay” means is that unsecured creditors must stop collection actions. Creditors are prohibited from launching or continuing lawsuits, and wage garnishments, against the bankrupt individual in question. Indeed, this automatic feature of bankruptcy law forbids creditors from contacting you at all.

Secured creditors, meanwhile, can still seize those assets you’ve provided as security if you don’t keep up with your payments.

How fast does the stay work?

The stay is automatic. It happens as soon as you file a bankruptcy or consumer proposal.

Filing for bankruptcy protection immediately negates any actions that have been started or are pending.

The trustee sends the stay to the bankruptcy court that is looking after your legal proceedings, and to your employer if there’s a garnishee underway, and should do so immediately after you declare bankruptcy. Creditor calls may take a few days to stop as notifications get sent and communication is filtered to the right departments.

It should be noted that the Stay of Proceedings does not apply to certain debts — including child support, spousal support and repayment of debts based on fraud or misrepresentation — that cannot be eliminated by bankruptcy law.

In part, the stay dictates:

upon the filing of a proposal made by an insolvent person or upon the bankruptcy of any debtor, no creditor with a claim provable in the bankruptcy shall have any remedy against the debtor or his/her property or shall commence a claim provable in bankruptcy until the trustee has been discharged or until the proposal has been refused, unless with the leave of the Court and on such terms as the Court may impose.

Typically, this arrangement is a cut-and-dried affair, with creditors and employers both understanding the intent of the stay and abiding by it faithfully. Sometimes, a bankruptcy trustee must threaten legal action because of a misunderstanding on the part of a stay’s intended recipient. And other times a creditor applies to the bankruptcy court to continue a specific legal action against you, and it is their right to do so if they can demonstrate that there are reasonable grounds for legal action.

If you have creditors threatening legal action, consider the benefit from a stay of proceeding provided under bankruptcy law.

Get creditor protection, stop the calls, stop the garnishments and eliminate debt. Give us a call at 1-866-747-0660. We can help.

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In this guide, I explain what will happen when you declare bankruptcy, how much it might cost, and what your recovery after bankruptcy may look like. I hope this information can help you decide if filing for bankruptcy is the right solution for you to clear your debts

How does bankruptcy work?

Bankruptcy in Canada is a legal process, legislated under the Bankruptcy and Insolvency Act (BIA). If you owe at least $1,000, reside or have assets in Canada and are insolvent (you can no longer pay your debts), you may file for bankruptcy.

When you file bankruptcy in Canada you assign non-essential assets and surplus income to your creditors in exchange for which your debts are released.

A bankruptcy can only be filed with a Licensed Insolvency Trustee. An LIT is a federally regulated debt professional, licensed to administer both bankruptcies and consumer proposals in Canada.  As an officer of the court, the trustee’s role is to ensure that all bankruptcy laws are applied equally and fairly to both the debtor and creditors.

One of the advantages of bankruptcy is that it is a legal proceeding. If creditors are taking you to court or garnisheeing your wages, bankruptcy law provides a mechanism to stop these types of aggressive collection actions.

What will happen when you declare bankruptcy?

Before bankruptcy

Prior to filing, a Licensed Insolvency Trustee is required to perform a debt assessment to see if bankruptcy is the right solution for you.

During this free consultation, the trustee will gain an understanding of your financial situation, including learning the causes of money stress in your life. They will ask questions about your income, assets (what you own), and debts (the people you owe money to). This information helps them review all possible debt relief options with you and prepare the necessary documents if you decide to go bankrupt.

If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for you financially.

Signing a bankruptcy petition

To file for bankruptcy protection, you sign various bankruptcy forms, including an “Assignment” and a “Statement of Affairs”. In your bankruptcy assignment, you state that you are handing over your property to the Licensed Insolvency Trustee for the benefit of your creditors. The statement of affairs is a list of all your assets and liabilities.

You will also be required to answer several questions about your situation including details about your family, work, and disposition of assets before bankruptcy.  It is an offence under the Bankruptcy & Insolvency Act to sell or hide assets from your creditors when you know you intend to go bankrupt.

With the advent of COVID-19 and the required social distancing, it is now possible to file bankruptcy online by video-conference and electronic signature. However, you must still file with a trustee in the province where you live or where most of your assets are if you live outside of Canada.

Creditor protection

Once your bankruptcy documents have been e-filed with the government and the bankruptcy court, you are legally bankrupt.

Upon declaring bankruptcy, you get immediate legal protection from your creditors through an automatic stay of proceedings. This stay is one of the advantages of personal bankruptcy since it legally prohibits your creditors from pursuing any further legal action to collect. Bankruptcy stops a wage garnishment, lawsuits, and collection activity.

Once you declare bankruptcy your trustee will contact your creditors and deal with your debts, so you no longer have to. You stop making payments to your creditors as soon as you file. Within 5 days, your trustee will send a notice of the bankruptcy to your creditors along with a proof of claim form. If you have accounts in collection, you simply tell the debt collector you are bankrupt, and the calls should stop. If a collection agency continues to harass you, talk with your trustee about speaking directly with the agent.

Surrendering assets

When you declare bankruptcy, you are required to surrender any non-exempt assets to the Licensed Insolvency Trustee who has a duty to realize on those assets for the benefit of your creditors. Your trustee will sell any assets for fair market value and the monies will be set aside in a trust account for distribution to your creditors. You can avoid the sale of an asset by arranging to pay the trustee the value of any equity in the property. Payments can be made over the length of your bankruptcy.

It’s essential to know you do not lose all your assets. There are provincial and federal bankruptcy exemptions that allow you to keep most personal property including:

• Personal items and household goods
• A single vehicle worth less than the provincial exception limit
• RRSP and pension savings (except for some recent contributions)
• Tools you need to work

 Another asset that must be realized on is tax refunds up to and including the year you file bankruptcy.

While not an asset, you are also required to stop using and surrender all credit cards once you file bankruptcy.

Duties during bankruptcy

During your bankruptcy, you have several primary duties. You will be required to:

• make your monthly bankruptcy payments
• attend two credit counselling sessions
• file monthly income and expense reports with your trustee

The credit counselling sessions are very beneficial to your financial recovery. They are designed to give you money management tools to help you budget, save and make better borrowing choices. These sessions also provide you with information on how to rebuild your credit after bankruptcy.

You may also be required to attend a meeting during bankruptcy. This does not happen in all personal bankruptcies but it is important for you to know that your creditors can request a creditors’ meeting during which they can ask questions about your financial affairs and can provide further directions to the trustee.  The Official Receiver, a representative of the Office of the Superintendent of Bankruptcy (OSB), can also request an examination of a bankrupt, which they do occasionally.  Most examinations are randomly chosen and uneventful.

Discharge

Upon completion of your bankruptcy, you receive a Certificate of Discharge. A bankruptcy discharge means that you are no longer obligated to pay your debts owing to creditors included in your bankruptcy.

There are 5 types of bankruptcy discharge:

• automatic (the most common)
• absolute (if a court hearing is required)
• conditional (you have additional duties)
• suspended (absolute but effective at a later date)
• refused

The key to obtaining an automatic or absolute discharge is to complete your duties as required during your bankruptcy.

After your bankruptcy, creditors will receive a proportional distribution of bankruptcy funds from your bankruptcy payments and realization from the sale of any assets that were surrendered. Any remaining debt owing is forgiven.

What not to do before filing bankruptcy

If you are considering bankruptcy, there are certain things you should not do before filing.

• Don’t max out your credit cards and lines of credit or take on new debt just before filing.
• Do not sell or transfer any assets to someone else with the intent to hide them from your creditors.
• Don’t omit creditors from your creditors’ list thinking you can keep that debt or pay them separately.
• Don’t make a preferential payment to or pay off any single creditor at the expense of your other creditors.
• Don’t hide information about a potential future inheritance, bonus, or windfall.
• Don’t forget to tell your trustee if you have filed a bankruptcy or consumer proposal before.

Activities like this will affect the advice you are given by the trustee, at best, and if viewed as fraudulent, could jeopardize your bankruptcy discharge. Your trustee is required to ask a series of general questions to review past transactions like these, so avoid these reviewable actions and be honest with your trustee in your disclosure.

Does bankruptcy clear all debts?

Bankruptcy eliminates most unsecured debts. People often file bankruptcy because they are no longer able to keep up with the minimum payments on their credit cards or may be struggling in a cycle of payday loans. However, bankruptcy discharges a wide range of legal obligations including:

• credit card debt
• unsecured lines of credit and bank loans
• financial company and installment loans
• unpaid bills
• interest and penalties
• accounts in collection
• judgments and lawsuits
• government obligations including tax debts and student loans if you have been out of school for 7 years.

There are however a few debts not discharged by bankruptcy include family responsibility arrears (child support and alimony payments), court fines, traffic tickets and debts due to fraud.

An unsecured creditor is required to file a proof of claim to be eligible to receive a dividend from your bankruptcy estate. However, even if they do not file a claim, unsecured debts included in your bankruptcy that exist at the date of bankruptcy are erased.

Bankruptcy also does not affect a secured creditor. As long as you keep up with your mortgage or car loan payment, you can continue to keep that asset. If you miss payments, bankruptcy does not prevent secured creditors from enforcing their rights to foreclose on your home or repossess your vehicle. If there is equity in any property beyond any exemption limit, for example substantial equity in your home, your trustee can provide you with options to keep your house or car if you can afford the monthly payments. 

How much does it cost to file for bankruptcy?

The base contribution fee to file bankruptcy in Canada is $1,800 for a first-time bankrupt. This pays for the trustee’s time, filing fees, and counselling fees.

Your specific bankruptcy costs are determined by the assets you own and your income.

• You are required to surrender or ‘buy back’ any assets that are not exempt from seizure by the trustee
• You may be required to make additional surplus income payments if your income is over the government-set threshold
• You will lose any tax refunds up to and including the year you filed

How long will I be bankrupt?

The length of time you will be bankrupt and are required to make bankruptcy payments is determined by your income and if you have declared bankruptcy before.

• A first bankruptcy with no surplus income lasts 9 months. Surplus income will extend your bankruptcy to 21 months.
• A second bankruptcy with no surplus income lasts 24 months. This is extended to 36 months if you have surplus income.
• A third bankruptcy can only be discharged after a court hearing.

Most personal bankruptcies in Canada involve no surplus income and last for nine months. This is because someone with high surplus income would find it more advantageous to file a consumer proposal as an alternative to making high monthly bankruptcy payments.

How does filing bankruptcy affect you?

How does bankruptcy affect my credit rating?

Bankruptcy will remain on your credit report for 6 years after discharge. Bankruptcy can affect how future lenders view your creditworthiness, but this impact is temporary. While your credit score will drop immediately after filing, you can often get a secured credit card while bankrupt. This will be reported on your credit report as new, and positive, credit history. After your bankruptcy, you can apply for additional credit lines and you will see a slow and steady improvement in your score.

Bankruptcy also has the advantage of ridding you of debts that are causing your current financial hardship. Falling behind on payments and having past due bills sent to a collection agency if you can’t repay your bills will also negatively affect your credit score and can be hard to overcome without bankruptcy if your debts are large.

The purpose of filing bankruptcy is to gain a fresh financial start. Eliminating debt means you can begin the process of rebuilding your credit after bankruptcy and create a stronger financial future. If you take the right steps to rebuild, you will see your score rebound.

Will bankruptcy affect my spouse?

In most cases, no. If your debts are not shared (your wife has not co-signed or is not a co-borrower) you can file bankruptcy with no impact on your spouse. Your bankruptcy does not affect your spouses credit report.

If you have joint debts (both names are on the debt) you may want to discuss filing a joint bankruptcy or proposal with your trustee.

Who will know I filed for bankruptcy?

Bankruptcy is a legal process and your documents are filed with the federal government, specifically the Office of the Superintendent of Bankruptcy. People can search the government records, but they must first know the name of a person to search and must pay a fee before any information is provided.

Your creditors will also be notified that you filed for bankruptcy.

A creditor is an individual or business that is owed money by the debtor. There are two major types of creditors: secured and unsecured. A secured creditor is one that holds a right or claim against the debtor’s property. An unsecured creditor does not have a direct claim on the debtor’s property.

A creditor must file a proof of claim to participate in any dividend distribution from your bankruptcy. They can also request a creditors’ meeting to review the affairs of the bankrupt, although this rarely happens in most personal bankruptcies in Canada. The creditor’s role also includes informing the trustee of any irregularities before or during the bankruptcy filing.

Your employer is not notified that you filed bankruptcy unless you have a wage garnishment. In that case, your trustee will notify the payroll department to ask them to stop taking money from your pay.

The OSB will also notify the credit bureau when you file including the date of filing and type of proceeding (a bankruptcy or consumer proposal). They update the credit reporting agencies at the end of your bankruptcy with the date of discharge.

Other than that, there is no public advertising or publication that you filed a bankruptcy in Canada.

How do I claim or declare bankruptcy?

Before you file, the trustee will review all your debt relief options so you can decide if bankruptcy is right for you.

The trustee will ask questions about your income, assets, and debts (who you owe). If you cannot afford to repay your debts in full, the trustee may recommend bankruptcy, but they might also suggest you consider filing a consumer proposal as an alternative to bankruptcy if this makes more sense for your financial situation.

If you are considering bankruptcy, talk with a Licensed Insolvency Trustee today.

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The concept behind personal bankruptcy is simple: you assign all non-exempt assets you own and make payments to the Licensed Insolvency Trustee for the benefit of your creditors, in exchange for which you are released from your debts.

6 Top Rules to Know

Here are the top rules that could have the greatest impact on your decision to choose bankruptcy as a way out of debt:

1. Student loans are automatically discharged after seven years;
2. RRSPs are exempt from seizure in a bankruptcy (under certain conditions)
3. Certain assets, like tax refunds, are seized in a bankruptcy. You keep all assets in a consumer proposal.
4. A secured lender cannot terminate a contract simply due to the filing of bankruptcy. For example, if file for bankruptcy and have a car loan, as long as your payments are up to date and you continue to make the payments you get keep your car. Similarly there are options that can help you keep your house.
5. If you file bankruptcy in Canada, you are required to reveal all your income. If you have surplus monthly income of $200 or more above the threshold allowed by law, the length of the bankruptcy period is automatically extended – for 21 months for a first time bankruptcy, and 36 months for second bankruptcy. Read our article on surplus income for more details.
6. The consumer proposal debt limit to be eligible to file is $250,000 for an individual and $500,000 for a joint proposal.

Read more: Bankruptcy vs Consumer Proposal

Layman’s Guide to the Bankruptcy and Insolvency Act in Canada

In Canada, all insolvency proceedings are governed by the Bankruptcy and Insolvency Act (BIA or The Act). The Act contains the bankruptcy laws, rules and guidelines to be followed by all stakeholders: the Licensed Insolvency Trustee, the debtor, and the creditors.

What is the purpose of the Bankruptcy & Insolvency Act?

The BIA (often more simply known as the “Bankruptcy Act”) is legislation established by the federal government to assist honest Canadian citizens who are unfortunate enough to run into financial difficulties. It protects the rights of indebted individuals and their creditors and ensures that trustees and the court live up to their responsibilities and duties.

Bankruptcy law gives a person who is struggling financially two options: come up with a financial proposal, or file for bankruptcy.

What bankruptcy options are available under the BIA?

For individuals there are 3 possible insolvency proceedings they can choose to deal with their debt.

1. Bankruptcy

Personal bankruptcy is a legal procedure available to Canadians to be discharged from the obligation to repay the eligible debts that were in place when the bankruptcy was filed. In exchange for the elimination of their debts, the bankrupt surrenders certain assets and, depending on their income, may make additional surplus income payments.

2. Consumer Proposal

A consumer proposal is an offer to creditors to pay a percentage of what is owed. Creditors vote on the proposal; they can choose to accept or reject it. In a proposal the debtor does not surrender any assets.  Instead, they make the agreed upon proposal payments over a period of up to five years. Once all the terms of the consumer proposal are met, the debtor is legally released from the debts included in the proposal.

3. Division I Proposal

A Division I proposal is more commonly thought of as a commercial proposal although it is an insolvency option available to individuals when their debts exceed $250,000.

Business Bankruptcy Options

An incorporated business can file bankruptcy, make a Division I Proposal or file something called a CCAA Plan of Arrangement under the Companies’ Creditors Arrangement Act.

In the case of unincorporated companies (small businesses that operate as sole proprietors and partnerships) it is not the business that files bankruptcy or any insolvency proceeding.  Instead, in the case of a small business bankruptcy, the owners file insolvency as an individual.

The Main Stakeholders

The primary parties involved in an insolvency proceeding (whether it is a proposal or a bankruptcy) are the debtor, the creditors, and the licensed insolvency trustee.

The Debtor

A debtor is someone who owes money to a creditor. In a bankruptcy, the debtor is known as insolvent since their liabilities exceed their assets and they don’t have the ability to pay their debts. The debtor files an assignment in bankruptcy or makes a proposal to their creditors.

The Bankrupt

When an insolvent individual files for bankruptcy, they are known as a bankrupt. A bankrupt person must make a full disclosure of all of their assets and debts to the LIT, inform the LIT of any property that was disposed of in the past few years; and give up all credit cards to the LIT.

The Creditors

Creditors are the people that the debtor owes money, goods, or services to. There are 3 types of creditors – secured, preferred, and unsecured. Creditors who are parties to a proposal may participate in meetings of creditors and vote at these meetings, appoint and serve as inspectors, and inform the LIT of any irregularities on the part of the debtor.

The Licensed Insolvency Trustee (LIT)

Licensed Insolvency Trustees are officers of the court licensed by the Office of the Superintendent of Bankruptcy (OSB). The LIT administers the proposal or the bankruptcy, investigates the financial affairs of the debtor, ensures that the debtor’s rights are not abused, and protects the rights of the creditors.

Overview of the Bankruptcy Process

Both a bankruptcy and consumer proposal can only be made through a Licensed Insolvency Trustee or LIT. Once filed, the debtor receives protection under the BIA until they complete all requirements of the proceeding.  This bankruptcy protection is known as a stay of proceedings.

Stay of Proceedings

A Stay of Proceedings is a legal benefit of bankruptcy that provides debtors with creditor protection in Canada. Upon filing a bankruptcy or proposal, creditors can no longer continue with most legal actions against the debtor. Their proceedings are “stayed.”

How a Stay of Proceedings Works

The debtor will supply the trustee with a list of all legal actions against them (whether pending, started, or completed) and the parties involved are given notice that a filing for a proposal or a bankruptcy has been made and that the stay is in place.

What a Stay of Proceedings Will Immediately Stop

• Wage garnishments (except for support payments).
• Collection activity, including activity by the CRA.
• Threats of legal action against the debtor for money owed to the creditors.
• Court actions that have already been filed by the creditors.
• Enforcement of court orders with respect to judgments already issued against the debtor.

What a Stay of Proceedings Won’t Do

• Stop court orders for child or spousal support. The only way to stop these kinds of payments is for the payer to request the issuing court to make changes to the order.
• Halt actions concerning certain types of debt such as fines and penalties, debts arising out of misrepresentation, fraud, or restitution orders.
• Prevent a secured creditor from repossessing property that the secured creditor has a lien against. For example, if the debtor has fallen behind on car payments the company that provided the car loan (the secured creditor) can take the vehicle.
• Remove a lien that is already registered, such as a lien against a house registered by the CRA for nonpayment of taxes.
• Recover property that has already been taken.

Motion to Lift the Stay of Proceedings

Creditors can ask the court to lift a Stay of Proceedings. However, to do so, a creditor must bring a motion before the court and argue that the action needs to proceed to determine how much the creditor is actually owed or that the type of debt is not covered by a consumer proposal or a bankruptcy. The debtor has the right to attend the hearing on the matter and argue against the request to lift the stay. It should be noted that it is quite unusual for a creditor to bring a motion to lift a stay.

How a Bankruptcy Works

To file bankruptcy, the debtor supplies the Licensed Insolvency Trustee with a list of debts and assets. Bankruptcy proceedings begin with an electronic filing of bankruptcy documents with the Canadian government through the Office of the Superintendent of Bankruptcy Canada. Within five days of the bankruptcy commencing, the LIT will send a copy of the bankruptcy paperwork to the creditors so that they can file claims.

Property Involved in a Bankruptcy

With certain exceptions, known as bankruptcy exemptions, all of the property and rights to property owned by the insolvent on the effective date of the bankruptcy vests in the trustee for the creditors. Property can include investments, goods, and land situated anywhere (not just in Canada). The trustee proceeds to liquidate the property and distribute the proceeds to the creditors in accordance with the distribution priorities prescribed under the BIA.

Duties of Bankrupt

Meetings of creditors may be held and inspectors appointed. If a meeting is called, the bankrupt is required to attend. The job of an inspector is to examine and give direction to the LIT’s administration of the estate of the bankrupt.

The bankrupt is required to prepare monthly income statements which will be used to determine if they must make additional payments.

The bankrupt is also required to attend two financial counselling sessions conducted by a Licensed Insolvency Trustee (LIT) or government licensed credit counsellor. The purpose of these meetings is to help the individual identify the causes of their financial problems and provide information and tools to improve their money management skills.

Certificate of Discharge or Discharge Order

Once the bankruptcy procedure is completed (usually after nine months) the bankrupt will, in most cases, receive a Certificate of Discharge, which means all of the bankrupt’s debts, with certain exceptions, are wiped out. If a bankrupt is not eligible for automatic discharge, the bankrupt can receive an Absolute Order of Discharge issued by the court once all duties are completed.

Overview of a Consumer Proposal

A consumer proposal is available to debtors who owe less than $250,000, excluding mortgages. It constitutes a legally binding agreement between the debtor and the creditors. The proposal is an offer by the debtor to repay a portion of the debt owed over a specified time, or to extend the amount of time to pay off the whole debt, or a combination of both. A consumer proposal can only be initiated and filed by a proposal administrator who is an LIT. Once filed and accepted by the creditors, a consumer proposal must be completed within five years.

How a Consumer Proposal Works

The proposal administrator examines the insolvent’s debts, income and assets and helps the individual structure the proposal. After the filing of the proposal with the OSB, the creditors will be notified, and the debtor is legally allowed to stop all payments on unsecured debts. The creditors have forty-five days in which to vote on and accept the proposal. Although the creditors can vote to reject the proposal, this is a very rare occurrence as the main requirement of a proposal is that the creditors should receive more funds than if the debtor went bankrupt and it is possible to renegotiate proposal terms to the satisfaction of both the debtor and creditor.

The Claims of the Creditors

In order to make a claim, each creditor must file a proof of claim with the trustee. The claim is then evaluated by the trustee who has the right to either allow or disallow the claim. If the claim is not allowed, the affected creditor has the option to appeal the trustee’s decision to the court. If the creditor has an allowable claim, the creditor will share in the recovery of funds from any realization of the property of the bankrupt.

Order of Payment to the Creditors

Generally speaking, this is the order of priority of payments to creditors:

• Secured creditors.
• Certain classes of preferred creditors (for example certain debt obligations under support payments).
• Unsecured creditors.

A orderly payment of debts is only available in certain provinces in Canada. Ontario does not provide for this program.

Secured Creditor

A secured creditor is one who has taken collateral in exchange for a loan. Examples are loans provided for the purchase of a house or a car. Secured creditors are generally unaffected by a Bankruptcy Order as they are entitled to take possession of the secured asset to be reimbursed. If there is not enough money to pay the total of what is owed, the secured creditor is allowed file a proof of claim as an unsecured creditor.

Secured loans, like a mortgage or car loan, remain in place with no impact to the debtor as long as they are current on all payments.

Preferred Creditor

A creditor who has a first claim to any available funds, such as an employee who is owed wages, or in certain cases, some debts under support obligations.

Unsecured Creditor

An unsecured creditor is one who has provided credit but who does not have any security for the amount owed to them.

The BIA and Corporations

In Canada, a business will officially become bankrupt under one of following scenarios:

• The company has attempted to reorganize itself under the proposal provisions of the BIA but the reorganization has failed.
• The corporation voluntarily takes the legal steps to become bankrupt.
• One or several of the corporation’s creditors obtains a Bankruptcy Order against the corporation.

The Companies Creditors Arrangement Act (CCAA)

The Companies Creditors Arrangement Act (CCAA) is one other piece of federal legislation that enables financially troubled businesses to restructure themselves. In a CCAA restructuring, the debtor company remains in possession of its property and continues to conduct its business. A CCAA monitor oversees the restructuring and reports to the court and the creditors on the company’s activities during the reorganization.

Large Corporations Can Choose Either the BIA or the CCAA

A successful CCAA restructuring enables the creditors to receive higher amounts than they would have received if the company’s assets had been liquidated. To be eligible for a CCAA restructuring, a corporation, either alone or with its affiliates, must owe in excess of $5 million and each affiliate must be insolvent. The relevant section of the BIA has no specified financial threshold for restructuring, so insolvent corporations that owe creditors more than $5 million may choose to reorganize under the CCAA or the BIA. Typically, the CCAA is used by large corporations.

Find a Licensed Insolvency Trustee

Hoyes, Michalos & Associates Inc. is an Ontario Licensed Insolvency Trustee with many years of experience. We appreciate that learning about all the aspects of the BIA can seem a bit overwhelming, but we are here to help you. if you are experiencing financial difficulties and are unable to pay your debts, contact us for a consultation on the debt relief options available to you.

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Most student loans are government guaranteed which means that the bank that provided the funding is protected in the event the loan goes into default.

In order to protect the government from a run on unpaid student loans, rules were added to Canadian bankruptcy law that state a student loan will not be covered or extinguished after bankruptcy or a consumer proposal if it has been less than 7 years from the last study date.

After this 7 year ‘waiting period’, if you haven’t been able to repay your student loans, personal bankruptcy or filing a consumer proposal can be a good option to obtain relief from your student loans.

Read Transcript

If you are considering filing a bankruptcy or consumer proposal and have student debt, it is important that you confirm your official ‘end of study date’. This date doesn’t mean the last day you attended school.  It is the date that the government considers to be the last date of the program you were last enrolled in. It also includes both full-time and part time attendance.

You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.

The rules around bankruptcy and student debt relief can be quite complicated, so it is important to talk through this 7-year rule with your Licensed Insolvency Trustee before filing.

Here is one example about what happens if you get the dates wrong:

Last Date of Study: Actual Case File

A few years ago, we met with Frank (not his real name) in our Vaughan bankruptcy office. He had enrolled in a human resources course at Humber College. To pay for the costs of his books and tuition, like many, he took out a student loan. For a variety of reasons, Frank eventually decided to quit in his final year. That was about 7 years ago.

After leaving Humber, Frank was unable to find steady employment, and unfortunately started to rely on credit cards to help cover his ongoing living expenses. Now married with a young child, Frank was finding it increasingly difficult to keep up with his student loan payments and his credit card payments and realized that he was in trouble. He came in to see us for a free consultation and we reviewed with Frank what his options were given his current financial situation. He decided to proceed with the filing of a bankruptcy. We explained to Frank about the special treatment of student loans and he was sure that it was more than seven years ago that he was at Humber, so he was certain that the bankruptcy would allow him to get rid of all his debts including his student loans. Frank filed for bankruptcy, and after nine months he received his discharge.

About six months after his discharge, Frank called us up and said that he was getting calls from the government wanting him to start making the payments on his student loans. They were even threatening to take legal action. While Frank was confident that he left school more than seven years ago from the date of his bankruptcy filing, the government was saying that while he may have left Humber more than seven years ago, they were relying upon the completion date of the courses that he was enrolled in rather than when he left Humber. As it turned out, the government was correct, and Frank was still liable for his student loans.

The message to learn here is to never proceed with any formal insolvency proceedings without first verifying the exact last date of study according to the government records.

While Frank was disappointed, we suggested that he see if he can apply to bankruptcy court to have his student loan included in his initial bankruptcy filing. Frank had been conscientiously paying his student loans for many years and without completing his education, he just could not find a job earning enough money to support his new family. Fortunately for Frank, the bankruptcy judge sympathized with Frank’s personal situation and agreed to order that his student loans be covered in his bankruptcy.

Frank was lucky that this did resolve to his benefit. However, always confirm your last date of study not only with your trustee, but with your student loan records.

If you need help with student debt, contact a Licensed Insolvency Trustee today for a free no-obligation consultation where we will look at all your debts with you and help you decide if a bankruptcy or consumer proposal makes sense to deal with your student debt.

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What is a Power of Attorney?

A power of attorney is a legal document that you sign to give someone authorization to manage your money and assets. In order to give someone power of attorney you can either visit a lawyer or download the power of attorney kit directly from the Ministry of the Attorney General.

When someone grants you power of attorney they’re authorizing you to act as their “Agent”. This means that they’re giving you the power to make financial decisions on their behalf. This includes their day-to-day banking, debt payments, and filing a consumer proposal or bankruptcy on their behalf.

How can a Power of Attorney help with debt?

Being someone’s Agent means that you are confident in taking responsibility and know their financials are in good hands. It’s beneficial for your parents because they may no longer be able to make the most sound, and responsible decisions for their assets.

The first step is to gather documents. Make a list of their bank accounts, investments, insurance, other assets and creditors. Review all income streams such as company pension, CPP, OAS, GIS and RRIF withdrawals.

If there isn’t enough money coming in to pay for their personal expenses and debt, a Licensed Insolvency Trustee can help you review options that are best for your parent.

We’ve put together some examples of clients who have been authorized to act as an Agent by their parents. Because of confidentiality reasons all names have been changed.

Mary and Janet

Mary was recently appointed as her mom Janet’s power of attorney. Janet retired many years ago from an administrative position at their local school board. Years of overspending (mainly helping out family) and medical expenses resulted in Janet asking Mary for help dealing with her debt.  When Mary and Janet added up Janet’s credit card debt, they found it totaled $23,000. Janet’s pension provided her with $2,500 a month, which she needed to cover her every day expenses. After trying several resolution plans on their own, Mary decided they needed professional help to get Janet out of debt.

When Mary first came to Hoyes Michalos, she realized the best option was to file a consumer proposal. Then Mary used her power of attorney, and filed a consumer proposal acting as her mom’s Agent. The creditors agreed to the proposal’s terms and Mary is now helping her mom manage her every day expenses.

John and Bill

John came to Hoyes Michalos to help eliminate his dad Bill’s debt. Bill was a retired teacher with a company pension. Without the stability of having somewhere to go each day, Bill turned to substance abuse. Because of his substance abuse, Bill was now dealing with medical issues and no longer able to manage his own money. John knew he needed to take control of his dad’s account, and Bill agreed to have John act as his power of attorney. So John decided the best course of action for his dad was to use his power of attorney and file bankruptcy on his behalf.

The bankruptcy process only changes slightly when using power of attorney.

The Agent needs to provide a copy of the signed power of attorney documents to the Licensed Insolvency Trustee. It is then forwarded to the Office of the Superintendent of Bankruptcy to keep on-file. All other duties in a bankruptcy remain the same. The only difference in the process is that the power of attorney completes them in place of the debtor.

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Let’s start with what we know.

We all know that if you don’t pay a debt, you will get collection calls and, perhaps, have your wages garnisheed. So yes you can ignore a debt, but it may lead to collection actions. Doing nothing isn’t generally a good option.

If you don’t have a job, you don’t need to worry about wage garnishments. But that doesn’t mean that you can simply ignore a debt and have it go away.

Debts don’t just “go away”

If you have no wages to garnishee, or no assets to seize, there many be no benefit to a creditor or debt collection agency taking you to court and suing you. So yes, you could just ignore the debt and not suffer direct financial consequences. The debt didn’t go away, you still owe the money. If a bank or credit card company can’t take collection action against you, it’s as though the debt has no impact on your financial life. But the debt is still there, and is still owed.

What is an old debt?

Section 4 of the Ontario Limitations Act states: a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

This is an over-simplified explanation on debt collection statue of limitations but, in simple terms, if you have not made any payments on a debt for two years, a creditor is not allowed to commence legal action against you. The debt is “old”, and the court does not want court actions for old debts. If you have a debt with no activity for more than two years, and if a creditor was to sue you, you could file a Statement of Defense saying the debt is past the limitations period. Of course, if you don’t defend yourself, the creditor could still get a judgement as the judge may not know it is an old debt. It’s important that you don’t ignore your legal paperwork if you are threatened with legal action.

Another definition of an “old” debt is six years, which is the purge period from your Equifax credit report. The purge period is when information is automatically removed from your credit report. This happens six years after the last activity date. So, if you make no payments on a debt for six years, that debt will no longer appear on your credit report.

NOTE: This does not mean that you do not owe the debt. It simply means that it no longer appears on your credit report, therefore not impacting your credit score. If you owed that money to ABC bank and six years later tried to borrow money for them again, they’ll still have a record of what you owed on file. It’s likely they’ll think twice before lending you money again.

Debts not included in limitation period

The description above applies to standard debts like credit cards and bank loans. Government enforced debts are not subject to the two year limitation period. In most cases government debts do not appear on your credit report, so there is nothing to purge after the six year time frame.

In other words, government debts don’t go away.

Debts not subject to a limitation period, and that are not automatically discharged in a bankruptcy are:

• Large tax debts owed to the CRA (if over $250,000 and 75% of total debts)
• Student loans (subject to special rules in a bankruptcy)
• Alimony or child support
• Parking tickets

Other debts like 407 ETR debts and a CMHC mortgage shortfalls can get complicated. Listen to the podcast to hear more.

Just because a debt is “old” does not mean that it goes away. If you have old debts, don’t assume you can just do nothing. If it’s less than two years old, the limitations act doesn’t apply and your creditor can sue you. If it’s more than six years old, it’s not on your credit report, but your chances of getting another loan at your former creditor is slim, or will come at the cost of extreme interest rates. If you owe the government money, you owe the government money. There’s no way around that.

The experts at Hoyes Michalos are here to review your debts and advise you on which actions you should take to deal with your debt. Whether they’re old or not. Book your free consultation today so we can help you make a plan to deal with your debts.

Resources mentioned in today’s show:

• Ontario Limitations Act
• Podcast #20 with Blair DeMarco-Wettlaufer: Stop the Collection Calls

Full transcript show #128 on Debt collection and the Ontario Limitations Act

Doug Hoyes: My firm, Hoyes Michalos & Associates posts a lot of information on 310Plan Facebook page and we get lots of comments. Obviously most of the stuff that we post is about debt so we get lots of people commenting on how to avoid paying debt without going bankrupt or filing a consumer proposal.

It’s very common for a commentator on our Facebook page to say something like don’t worry, if your debt is old you don’t have to pay it, it just goes away. Well, is that true? What actually happens to old debts? Do you have to pay them? Well, those are the questions I’m going to answer today on this Technical Tidbits edition of Debt Free in 30.

Now before we discuss what happens to old debts let’s start with a more basic question, what exactly is an old debt? Well, there are three possible answers to that question. It could be any debt that’s passed due, it could be any debt that’s more than two years old or it could be any debt that’s more than six years old. Now why are those two years and six years time limits important? Well, let’s talk about the lifecycle of a debt.

So, let’s say you’ve got a standard unsecured debt, a credit card debt, a bank loan. We’re not talking about car loans or mortgages, that would be a special case. But a standard unsecured debt and you’re not able to pay it. So, what happens? Well, you miss the first payment and the original credit, the bank, will send you a letter, they’ll call you, they’ll ask for their money. If after two or three months they’re not getting anywhere with you, maybe three of four months, they will turn the debt over to a third party collection agency. The bank doesn’t want to be collecting from you forever, they turn it over to a collection agency.

So, I guess you could say well at that point my debt is starting to get old because it’s no longer with the original bank. Legally there’s no difference between a debt that’s one month or six months old. If you want to know more about how to deal with third part collection agents, how to deal with collection agencies in general, we’ve got lots of information on our hoyes.com website. I did a podcast with a collection agent, Blair Demarco Wettlaufer, that was podcast number 20. So, if you got hoyes.com and search for collection agents you’ll see all sorts of information in how to deal with them.

Let’s take a look at a second case where a debt that is more than two years old. This is a much more special case because in Ontario we have something called The Ontario Limitations Act. Under the Ontario Limitations Act, and again I’ll put links to this in the show notes over at hoyes.com, section four of the limitations act says unless this act provides otherwise a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

Okay, that’s a bunch of legal mumbo jumbo. What does that actually mean? It means that once a debt is two years old, it is very difficult for a credit to sue you for that debt. When does this two year start? Well, if you look at subsection five sub three it says for the purposes of sub clause 1 A, the day on which the injury, loss or damage occurs in relation to a demand obligation is the first day on which there is a failure to perform the obligation once a demand for the performance is made.

Now I’m not a lawyer and you should not construe anything I say as legal advice. I will tell you my interpretation of what that phrase means and you can investigate it for yourself. But in common usage it means the two years starts when you fail to perform your obligations which is when you fail to make a payment. So, if you are supposed to be making a payment every month and you stop making payments, then the two year clock starts at the time of your last payment. Or what would show up on your credit report as the last activity date.

So, it’s not when you got the loan that matters, it’s when you stopped performing your obligations. It’s when you stopped paying it that matters. So, for the purposes of this two year rule, if you haven’t made a payment for two years, then it is outside the limitations period. Now the Act says that again, I quote from section four, a proceeding shall not be commenced. In other words, a creditor is not supposed to sue you for a debt that is more than two years old, or more specifically for a debt where no payments have been made in more than two years when they should have been made.

In real life what that means is if you have not made payments in two years and if a creditor sues you, even though the act says they’re not supposed to, you would be required to defend the action. Either by filing a statement of defence with the court or more likely actually showing up in court on the date of the court action, the trial. It would probably be small claims court, you’d show up in court and say to the judge, hey judge the last activity date on this debt was more than two years ago, therefore according to the Ontario Limitations Act, they should not be able to sue me. That’s how the Limitations Act works.

Yes, it is supposed to prevent creditors from suing you but if a creditor does sue you and the judge doesn’t know that the debt is more than two years old and the judge doesn’t know to ask, then they still could get a judgment against you so you must defend yourself. That’s the key point about the two year rule. So, if you have a debt where you’ve not made payments for more than two years, then the Limitations Act works to your advantage. Now I said that there were three time periods that mattered, when it goes to collections, well we’ve already talked about that The Ontario Limitations period, which is two years and it’s different in other provinces.

There’s also your credit report, information stays on your Equifax credit report for, in general, six years. More specifically old information is purged from your credit report after six years. So, when you get a copy of your credit report, most of the debts listed will have a last activity date. If the date is more than six years old, the information in general is automatically purged. Because there’s no point in having information on your credit report that is more than six years old, there’s really no point.

So, that does not mean you don’t owe the debt, it just means that it doesn’t show up on your credit report. That’s the difference between the two years and the six years. So, before I explain what all this means in the big picture, let me tell you that there some exceptions to all this, things like tax debt for example are not subject to any limitations period, if you owe the government, you owe the government. And the only way you don’t owe them is if you pay them or if you file a bankruptcy or a consumer proposal, that’s it.

So, tax debt is not subject to the limitations period. Student loan debt, same thing, there are special rules that government debt, student loan debt being one of them and in fact as a general rule, any kind of government debt is not subject to the two year limitation period. Things like parking tickets, speeding, tickets, those are all government related debts, they’re not subject to the limitations period. Alimony and child support, same thing. If you owe it, you owe it. It doesn’t matter how old it is, you still owe it. Another example of a government debt would be like a CMHC shortfall on a house. So, there are debts that are not included in the limitations period. If you have old debts it’s good to get professional advice, talk to a Licensed Insolvency Trustee, talk to a lawyer and figure out whether your debts apply or not.

So, let’s summarize this by looking at what the whole point is. So, the point is this. Just because a debt is old, does not mean it goes away. Just because a collection agency is calling you, doesn’t mean you don’t have to pay, they’re still going to keep calling you. Just because a debt is over two years old, you still owe the debt. All that means is if the creditor was to take you to court and sue you, your defence, if you made one, would be that the debt is past the limitations period. You still owe the debt, they just can’t legally collect it from you by getting a judgement in court.

If a debt is more than six years old, it likely will not show up on your credit report. It doesn’t mean you don’t owe the debt, it just means at that point they can’t really sue you for it and it’s probably not showing up on your credit report. And again, there are certain debts that are not – that don’t follow with these rules.

So, if it’s a normal debt, like a credit card and it’s been more than two years since you last used the card or made a payment, it is still possible that the creditor could sue you. If they do, you have to appear in court to defend yourself and your defence would be that the debt is older than the limitation period. And assuming the judge knows the law, the creditor won’t be able to get a judgment against you.

The key point is that if you are sued for an old debt, you have to defend yourself or else the creditor is likely to get a summary judgment against you even if the debt is old because the court may not realize that it’s an old debt if you aren’t there to tell them. The bank may not be able to get a judgment against you if it’s been more than two years since you made a payment but you still owe the debt and it still appears on your credit report.

If it’s a government debt like taxes or a student loan or a CHMC shortfall on a house, it never goes away. CRA can keep taking your tax refunds and taking other action until the debt is paid. So, if you have old debts, don’t just assume you can do nothing. Don’t believe everything you read on a Facebook page, contact an expert, a Licensed Insolvency Trustee for the real answer in your situation. We may advise you to do nothing. We may say hey, look, you’re on a pension, you don’t have any assets, it doesn’t matter that it appears on your credit report, don’t worry about it.

On the other hand you may say hey but I want to be re-establishing my credit, I want to be financing a car, buying a house in the future, I want my credit to be cleaned up. Well, if you’ve got a two year old debt on your credit report, even though you can’t be sued for it probably, it’s still showing up on your credit report, it’s still negatively impacting your credit score, it may be a good idea to file a bankruptcy or a consumer proposal to deal with it. Or there may be many other options to deal with it. Maybe you can make a settlement directly with a creditor. The point is there are lots of different options, don’t just assume that the do nothing option is correct for you. It might be, and if it is we’ll tell you, but if there are other options, you want to consider them. That’s the point.

That’s our show for today, full show notes can be found on our website at hoyes.com that’s h-o-y-e-s-dot-com, including a link to the Ontario Limitations Act and a list of all of our Licensed Insolvency Trustees who can help you make a plan to deal with your old and your new debts. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

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