how creditors collect their debts
consumer proposal

How creditors collect their debts

There is a lot of misconception of what creditors can and cannot do to collect their debts. To dispel some myths, this post will walk you through the steps a creditor will typically take in collecting its debt.

Please note that the content of this post applies to residents of Ontario and its legislation.

Step 1: Dealing with the Creditor

If you have fallen behind in your payment to a creditor, it will usually send you a notice of your late payment by mail. If it receives no response, their collection department will start calling you by phone.

Step 2: Dealing with a Collection Agency

If no satisfactory payment arrangements are made, the creditor will retain a collection agency to collect its debt.  Ontario regulates collection agencies through the Collection Agencies Act and its regulations. The Act’s regulations forbid collection agencies from:

  • Contacting a debtor until six days have passed from sending the debtor written notice of the following:
    • the name of the creditor
    • the balance owing
    • the name of the agency and its authority to demand payment
  • Contacting a debtor on Sunday, except between the hours of 1 p.m. and 5 p.m., and on a holiday
  • Contacting a debtor, other than by ordinary mail, more than three times in a seven-day period without consent, once the agency has actually spoken with the debtor
  • Using threatening, profane, intimidating or coercive language, or using undue, excessive or unreasonable pressure
  • Continuing to contact a debtor if he or she has told them that he or she is not the person they are looking for unless they take reasonable precautions to ensure he or she is that person
  • Giving false or misleading information to any person
  • Contacting a debtor’s employer except on one occasion to obtain employment information, unless the employer has guaranteed the debt, the call is in respect of a court order or wage assignment or the debtor has provided written authorization to contact the debtor’s employer
  • Contacting a debtor’s spouse, a member of the debtor’s family or household, or a relative, neighbour or acquaintance except to obtain the debtor’s address and telephone number unless the person contacted has guaranteed the debt or the debtor has given permission for the person to be contacted.

If you have an issue with a collection agency, you can file a complaint with Ontario’s Consumer Services Bureau at 416-326-8800 or 1-800-889-9768.

Step 3: Filing a Lawsuit

If the creditor is unsuccessful in recovering money from you by itself or through a collection agency, the next step it will take is to file a lawsuit against you. In the majority of cases, lawsuits are filed in Small Claims Court (assuming you owe the creditor less than $25,000). Here are the steps a bank must take (hereinafter referred to as the “Plaintiff”):

  • It will file what is called a “Plaintiff’s Claim” (hereinafter referred to as the “Claim”) with the Small Claims Court. This document is just a summary of: (1) who is the plaintiff; (2) who is the defendant (i.e., you); (3) what happened that led to the lawsuit; and (4) what the plaintiff is asking for.
  • The Claim must be served on you personally. If it cannot be served on you personally, then it must be left with an adult member of your household. In addition to leaving it with her, the Claim must also be couriered or mailed to your address no later than the day after personal service was attempted. The Plaintiff then completes and files an Affidavit of Service with the Court to prove the Claim was served on you.
  • You may dispute all or a portion of the Claim in your Defence, which you must file with the Small Claims Court within 20 days after being served the Claim. If you do not file a Defence, then the Plaintiff is in a position to obtain a Default Judgment against you.
  • If you do not pay after the Plaintiff obtains a judgment against you, it can enforce the judgment by garnishing your bank account or your employment wages. The Plaintiff must first complete an Affidavit for Enforcement Request and a Notice of Garnishment which the court clerk signs. The Plaintiff must serve the Notice of Garnishment and a Garnishee’s Statement to you and your employer/bank (“the Garnishee”) personally, by courier or by mail. An Affidavit of Service is then filed with the court proving that these notices were served on you and the Garnishee.
  • The Garnishee then pays the garnished proceeds to the court, which will subsequently be remitted to the Plaintiff.

You should note that there are certain types of income that cannot be garnished, pursuant to Section 7 of the Ontario Wages Act:

  • Garnishment of employment income is restricted to 20 percent of wages AFTER statutory deductions for income tax, CPP and EI. That is, only 20% of your take-home pay can be garnished.
  • Income from employment insurance, social assistance, pension payments are exempt from garnishment. However, payments from an insurance or indemnity scheme that are intended to replace income lost because of disability are deemed to be wages, and can be garnished.

Step 4: Stopping a Garnishment

A garnishment can only be stopped in the following circumstances:

  • The debt is paid in full, either by you directly or through a garnishment of your bank account or wages.
  • You file a proceeding under the Bankruptcy and Insolvency Act, such as a personal bankruptcy or consumer proposal. Upon filing such a bankruptcy or proposal, your creditors are subject to what is called a “stay of proceedings”. This means that your creditors are legally prohibited from continuing or commencing actions to recover their debts.

If you find yourself in this situation, please contact one of our associates who shall be more than happy to review your circumstances with you and explore these legal options.

This post should not be interpreted as legal advice or a legal opinion. Please consult your Fong and Partners Inc. advisor to review your own particular circumstances.

© Copyright Fong and Partners Inc 2010.

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With over 20 years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. in 2007 so that he could dedicate his professional life to help people from all walks of life to deal with their debt.