When You Should and Shouldn’t Pay Your Debt Collectors
If you owe money and you haven’t been keeping up with your payments, your creditors may send a collection agency after you. This agency will likely make various threats, demanding that you pay them. However, the situation isn’t always as straightforward as it seems. A variety of solutions are available to you, including the options of filing a consumer proposal or bankruptcy that may help you alleviate your debt.
There are some circumstances where paying the agency may not be the best idea. Why you shouldn’t pay a collection agency? The main reason is that, once a debt goes to a collection agency, it has already been reported to the major credit bureaus. This means that it has already damaged your credit rating. Paying the collection agency doesn’t change that. However, you may have the ability to file a consumer proposal and reduce your debt, making paying a collection agency a lot more accomplishable.
Therefore, one of the reasons not to pay a collection agency is that it won’t help improve your credit score or erase the damage caused by missing payments in the first place.
Your credit report contains details on every loan you’ve taken out in the last six years. If you miss payments, this is recorded and it hurts your credit score. Therefore, even if you pay the debt by paying the collection agent, this counts as a regular credit transaction and the damage will stay on your record for six years. Other options such as a consumer proposal can help reduce and get your debt paid off, potentially helping you rebuild your credit in the long-term.
Should You Pay a Collection Agency?
Paying your debts is important. If you don’t pay your debts, you will damage your credit score and, if you damage your credit score, it will be very difficult to get a loan in the future. It may even be more difficult to rent a home, since some landlords will check your credit score before they will rent to you.
Not paying your debts can also potentially lead to your creditors taking legal action against you. A licensed trustee may be able to intercede on your behalf before this happens and help you negotiate through the consumer proposal process.
However, while paying your debts is important, there are reasons not to pay a collection agency.
One big reason why you shouldn’t pay a collection agency is that this doesn’t help improve your credit rating. The most likely scenario is that you pay the debt you owe, then you have to wait six years for the information to be removed from your credit report. You’ll be out of the money you spent to repay the debt and your credit score will be hurt. Even if the collection agency is willing to take less than the full amount, this doesn’t solve the credit score issue.
What Happens If You Never Pay Collections?
While there are reasons why you shouldn’t pay a collection agency, it’s also important to know what may happen if you don’t pay. Creditors and collection agents are able to take you to court if you don’t pay your debts. If they can obtain a judgment against you in court, they are then able to garnish your wages or freeze your bank account. These are obviously not situations that you want to happen. That's why engaging with a licensed trustee to learn more about consumer proposals may be a good avenue to pursue.
However, since going to court is costly and time-consuming, it usually only happens in cases where a large amount of money is owed.
This is a different situation from explaining why you should not pay creditors. Creditors are owed money and, if you can repay them on time, you certainly should. However, once you start missing payments and the debt goes to a collection agency, it negatively affects your credit rating and the situation regarding payment may change.
What Are The Benefits of Not Paying a Collection Agency?
As mentioned, there are reasons not to pay a collection agency. When it comes to explaining why you should not pay debt collectors, it’s important to note that this doesn’t mean you shouldn’t pay your debts. What it does mean is that you should not pay a collection agency assuming that it will help avoid damage to your credit report or prevent damage from happening in the first place.
If you miss payments on your debts, the creditor will likely pass this information on to the major credit bureaus (TransUnion and Equifax in Canada). This will negatively affect your credit score. If you miss enough payments that the creditor sources an outside collection agency to attempt to collect, then your credit score has almost certainly been negatively affected already. At this point, even if you pay the debt, it won’t improve your credit situation.
Your credit report contains information on every loan you have taken out in the last six years. If one or more of these debts ends up going to collections, this fact remains on your credit report for six years even if you pay the debt. If you do decide to pay the debt, a consumer proposal may substantially reduce the amount you have to pay back.
What Alternatives Are There to Not Paying a Collection Agency?
When discussing why you should not pay debt collectors, it’s important to note that creditors and collection agents can take you to court if you don’t pay. If they are able to get a court judgment against you, they can then take further collections action such as garnishing your wages. However, this typically only happens in cases where the amount owing is large enough to justify the time and money it takes to go to court. A consumer proposal may help you completely avoid such a scenario.
While there are reasons why you should not pay creditors once a debt goes to collections, it’s important to understand the alternatives before you decide how to proceed.
If you’re receiving calls from collection agencies, you could:
- Pay the collection agency
- Not pay and risk being taken to court
- Work with a credit counsellor on a debt management plan
- File a consumer proposal to reduce the amount you have to pay
If you decide to work with a credit counsellor on a debt management plan, you will likely still have to pay the debt in full. You may, however, save some money in interest charges or be given more time to pay the debt. Working with a credit counsellor is reported on your credit report, but it only remains on the report for three years after it is completed (rather than the six years it lasts if you pay the collection agency).
In a consumer proposal, you work with a Licensed Insolvency Trustee to prepare an offer to your creditors. Most consumer proposals are for less than the full amount owing. If you file a consumer proposal, this is also noted on your credit report, but your debts will be noted as “included in a proposal,” rather than unpaid or sent to collections. This note remains for three years after the proposal is complete. This means the sooner you pay off your proposal, the shorter it will remain noted (if you pay off your proposal in two years, the proposal will be noted for five years, for example).
A key difference between credit counselling and filing a consumer proposal is that you will only pay a portion of what you owe with a consumer proposal.
Can You Negotiate With a Collection Agency?
If you’re wondering why you should not pay creditors or why you should not pay debt collectors, you’re likely also wondering if you can negotiate with them. In some cases, you can negotiate with a collection agency. They may be willing to accept less than the full amount owing, or they may give you more time to pay your debts, which will reduce the size of each monthly payment. A licensed trustee can help you negotiate through the consumer proposal process.
However, even if you are able to successfully negotiate with a collection agency, this doesn’t improve your credit report.
How a Certified Insolvency Trustee Can Help
When you’re struggling with debt, it can seem like there are no options available. However, this likely isn’t true. Talking with a certified Insolvency Trustee can help you understand your options. A trustee will review your financial situation and give you information on all the debt relief options such as a consumer proposal that are available to you. You can then compare these options and decide which one makes the most sense for you.
Why You May Want to Consider a Consumer Proposal
In a consumer proposal, a Licensed Insolvency Trustee will review your finances and determine what a fair offer to your creditors will be. In the vast majority of consumer proposals, this offer is for less than the full amount. If the creditors owed the majority of the debt decide to accept the proposal, then all are bound by its terms. This not only puts you in a situation where you only have to pay a portion of the debt you owe, but it also avoids having to negotiate with each individual creditor. Learn more about consumer proposals.
When you file a consumer proposal, this is noted on your credit report. It remains on your report for three years after the proposal has been completed. Compare this to paying a collection agent the full amount you owe and having it noted on your credit report for six years, and you can see why a consumer proposal may be the right option for you, depending on your financial circumstances.
How We Can Help
If you are having trouble paying your debts and unsure of where to turn, we can help. Our Licensed Insolvency Trustees offer a free consultation where they will review your finances and give you information on the options that may be available to you. W
Trustees are legally required to give information on all available debt relief options, not just the ones they administer. This means you will get all the facts you need to make the right decision for your financial future.
Dealing with collection agents and stressing about debt doesn’t have to last forever. Working with us can help you resolve your debt problems and head on a path towards living debt free.