Why You Should Think Twice Before Paying a Collection Agency (2024)

When a debt you owe becomes way overdue, your creditor may send it to a collection agency. The role of a collection agency is to extract payment from you using whatever measures are necessary and legal. In addition to aggressive collection calls, they may also pursue legal action against you, like wage garnishment.

Not surprisingly, being chased by a collection agency can leave you feeling stressed, frustrated, and helpless. So, to end this madness, you should pay the debt you owe as soon as possible, right?

Not necessarily.

It’s not always wise to pay a debt collection agency, even though that may be your first instinct. Depending on your circ*mstances, doing so may only worsen your financial situation and compound your problems.

In this article, we’ll explore how doing the “right thing” by paying a collection agency may not be the ideal course of action.

What happens when your debt is sent to a collection agency?

If you have an outstanding debt that’s way past due (usually 90 to 120 days), your creditor may decide to send your account to a collection agency in the hope they can recover all or a portion of what you owe. They can do this without obtaining your permission.

A creditor can transfer debts to a collection agency in one of two ways: assigning the debt or selling it.

In a debt assignment, the collection agency will work to gather payment on your creditor’s behalf. Your creditor still retains the rights to the debt, so they receive any funds collected. The collection agency gets to keep a percentage as a fee for their services.

If your creditor sells your account to a collection agency, they surrender all ownership rights to the debt. The agency will attempt to retrieve the amount owed and keep all the proceeds. Under this scenario, you no longer owe your creditor money – only the collection agency.

Once the collection agency assumes control of your debt, they’ll notify you of the fact through a written notice (called a debt validation letter). From there, they’ll begin their collections efforts, which may include making frequent phone calls asking for payment to filing a lawsuit.

What’s the impact on your credit score?

When a lender transfers your account to a collection agency, credit bureaus (Equifax and TransUnion) will be notified and record the action on your credit report. You’ll receive an R9 credit rating, the most severe in Canada. Credit bureaus assign the same rating to bankruptcies.

As a result, your credit score will take a substantial dip, making it more difficult for you to qualify for loans at low-interest rates.

An account sent to the collection will remain on an Equifax credit report for six years following your last payment and seven years on a TransUnion report.

What are the consequences of not paying a collection agency?

The longer you abstain from making a payment on your debt, the more severe the action the collection agency may take to recover the money.

After collection calls, emails, and other payment reminders have failed, the agency can file a lawsuit against you. You can dispute the debt in court, but the collection agency will easily win its case if you rightfully owe the money.

After the court confirms you owe the unpaid balance, the collection agency can apply for a separate court order to freeze your bank account or garnish your wages.

Why it may not be worth paying a debt collection agency

It may seem sensible to pay a collection agency to stop those pesky collection calls and avoid possible legal action. However, in some instances, you’re better off not paying. Here’s what you need to know before deciding whether or not to comply with a collection agency’s demands.

Paying off the debt won’t boost your credit score

Settling your unpaid debt by paying the collection agency won’t directly improve your credit score. An R9 rating will remain on your credit report for at least six years from your last payment, regardless of whether you pay off your balance. Paying the collection agency won’t reverse the damage to your credit already done.

Making a payment will take you longer to repair your credit

Paying a collection agency will lengthen the time your debt remains on your credit report. As noted, an account sent to collections is purged from your file after at least six years.But this time frame is based on the date of your last transaction.

Suppose you make a payment anytime during this crucial period. In that case, the collection agency will report the activity to the credit bureaus. Unfortunately, this will restart the six-year waiting period. Not good!

By continually resetting the debt clock through partial payments, it’ll take more than six years before the debt disappears from your credit report. As a result, it’ll be a long time before you get a chance to rebuild your credit score.

Collection agencies have a limited time to take legal action

While a collection agency has the right to sue you to recover the debt you owe, they have a narrow window of opportunity in which to do so.

The statute of limitations for debts in Canada states that general creditors can sue you for unpaid unsecured debts up to a maximum of six years. However, each province has its own statute of limitations, which can be considerably shorter.

For example, in Ontario, a collection agency has two years from the date of the last account activity to commence legal action. Once this period expires, they can no longer take you to court.

It’s important to remember thatconducting an activity on your account will reset the statute of limitations if the maximum period (2 years in Ontario) has not been reached.This is a major reason why you should avoid making a payment to a collection agency.

In addition to payments, doing any of the following will reset the statute of limitations:

  • Negotiating a new payment plan
  • Acknowledging the debt
  • Entering into an agreement to pay
  • Accepting a settlement offer

Collection agencies may attempt to coax you into making a small token payment. Or they may offer you an enticing payment schedule in the hope that you agree to the terms in writing.But the purpose of such tactics is to reset the limitations period, so they have more time to take legal action.

For this reason, you must be aware of your last payment or other account activity before you respond to any requests or inquiries. Don’t let the collection agency keep resetting the limitations period.

Debt settlement

The final reason for not paying a collection agency is that you may be able to settle the debt for a smaller sum than your currently owe. For example, you can contact the debt collector and see if they’d be willing to forgive a portion of the debt. Or you may want to file a consumer proposal.

Factors to consider before deciding whether to pay a collection agency

As explained earlier, there are valid reasons for not paying a collection agency.

However, collection agencies can be very cunning and persistent. Ignoring their demands risks facing a lawsuit, wage garnishment, or a bank account freeze. All of this can occur before your province’s statute of limitations expires.

It’s up to you to weigh the risks of paying vs not paying a collection agency.Here’s what factors to consider before making your decision:

  • Size of the debt.Generally, the smaller the debt you owe, the less likely the collection agency may decide to sue you.
  • Date of your last account activity.Remember, unpaid debts are wiped from your credit report after six years. If you’re already five years in, simply waiting it out is wise.
  • Statute of limitation expiry date.As your debt approaches the statute of limitations expiration date, the threat of a lawsuit diminishes. Once it expires, the collection agency loses tremendous leverage over you.
  • You own no assets and have no income.If you have no assets or income the collection agency can seize, you have nothing to fear from a lawsuit. You’re considered “creditor-proof.”
  • You have options for debt settlement.Sometimes, you can arrange a debt settlement where you pay less than what you currently owe.
  • The collection agency can’t prove you owe the debt.If you’re skeptical about an agency’s claim that you owe them money, ask them to provide proof. You can safely ignore their payment requests if they cannot do so.

Other ways to deal with debt sent to a collection agency

Here are some alternative options to explore to deal with debt you owe to a collection agency:

Debt settlement.Negotiate with the collection agency to pay less than the total amount you owe. However, such agreements don’t guarantee protection from lawsuits, garnishments, or collection calls. The collection agency can still employ these tactics at its discretion.

Debt management plan.A debt management plan (DMP) is a debt repayment arrangement done with the aid of a nonprofit credit counselling agency. A credit counsellor will work with the collection agency to reduce or waive future interest charges and late fees. However, you’re still required to repay the entire principal. In addition, any debt repayment plan under a DMP isn’t legally enforceable – the collection agency can opt-out at any time.

Consumer proposal.A consumer proposal is a federal debt-relief program that allows you to discharge your unsecured debt by up to 80%. You’ll pay down your remaining debt under a single monthly payment over five years – and no interest charges will accrue. It also offers legal protection from creditors and collection agencies.

Bankruptcy.Filing bankruptcy will eliminate your unsecured debts, immediately stopping collection calls and allowing you to rebuild financially from the ground up. However, you should not pursue bankruptcy lightly, as it has some significant downsides.

While paying a collection agency and stopping those dreaded collection calls may be tempting, it’s not always in your best interest to do so. Consider the factors outlined in this article to weigh the costs and benefits of paying off your overdue debt.

Sometimes doing nothing is the best solution. And remember: In Canada, you have many debt relief options at your disposal.

If you need guidance on resolving debt held by a collection agency, book a free, no-obligation consultation with . One of our knowledgeable and passionate Licensed Insolvency Trustees can help you find the ideal solution.

Photo by Nicola Barts

Why You Should Think Twice Before Paying a Collection Agency (2024)

FAQs

Why You Should Think Twice Before Paying a Collection Agency? ›

Paying an old collection debt can actually lower your credit score temporarily. That's because it re-ages the account, making it more recent again. This can hurt more than help in the short term. Even after it's paid, the negative status of “paid collection” will continue damaging your score for years.

How does the 11 word credit loophole actually work? ›

Under the FDCPA, you have the right to request that a debt collector stop contacting you. This is sort of where the 11 word phrase to stop debt collectors came from. To exercise this right, you must send a written request to the debt collector stating that you wish to cease all communications.

What is the best way to negotiate with a collection agency? ›

6 Steps for Negotiating With Debt Collection Agencies
  1. Learn About the Debt. By law, collection agencies must provide evidence that the debt is your. ...
  2. Understand What You Can Afford To Offer. ...
  3. Speak to the Debt Collector. ...
  4. Make Sure All Agreements Are in Writing. ...
  5. Make Your Payments. ...
  6. Negotiate Improvement to Your Credit Reports.
Aug 10, 2023

Is it worth paying a collection agency? ›

It's typically better to pay the original creditor instead of paying a collection agency. Ideally, you'd reach out to the original creditor before your account is sent to collections. “Telling your lender you're having financial difficulty allows them to be sensitive to your situation,” Wood said.

Why shouldn't you pay debt collectors? ›

By paying the collection agency directly, the notification of the debt could stay on your credit report longer than if you attempt to use another option, like filing for bankruptcy. When institutions check your credit report and see this information on it, it may harm your ability to obtain loans.

What is the 15 3 credit trick? ›

The date at the end of the billing cycle is your payment due date. By making a credit card payment 15 days before your payment due date—and again three days before—you're able to reduce your balances and show a lower credit utilization ratio before your billing cycle ends.

What should you not say to a collection agency? ›

Don't provide personal or sensitive financial information

Never give out or confirm personal or sensitive financial information – such as your bank account, credit card, or full Social Security number – unless you know the company or person you are talking with is a real debt collector.

What percentage should I pay a collection agency? ›

Some want 75%–80% of what you owe. Others will take 50%, while others might settle for one-third or less. If you can afford it, proposing a lump-sum settlement is generally the best option—and the one most collectors will readily agree to.

What percentage should I offer to settle debt? ›

What Percentage Should You Offer to Settle Debt? Consider starting debt settlement negotiations by offering to pay a lump sum of 25% or 30% of your outstanding balance in exchange for debt forgiveness. However, expect the creditor to counter with a request for a greater amount.

What's the worst a debt collector can do? ›

Debt collectors are not permitted to try to publicly shame you into paying money that you may or may not owe. In fact, they're not even allowed to contact you by postcard. They cannot publish the names of people who owe money. They can't even discuss the matter with anyone other than you, your spouse, or your attorney.

Should I pay off a 3 year old collection? ›

Paying off old debts before they reach the statute of limitations or credit reporting deadline can positively influence your payment history, a significant factor in your FICO score.

What is the safest way to pay a collection agency? ›

Once you and the debt collector have reached a written agreement to pay off the debt, you'll make your payment. The most secure way to pay a debt collection agency is by mailing a check with a return receipt. This will prove that the collection agency accepted the check.

Why should you never pay a charge off? ›

Your credit could be damaged for seven years.

Missed payments, charge-offs and collections remain on your credit report for seven years. Their mention on your credit reports and their effect on your credit scores could impact your ability to get new credit in the future, though their effect diminishes over time.

Can I pay the original creditor instead of collection agency? ›

Generally, paying the original creditor rather than a debt collector is better. The creditor has more discretion and flexibility in negotiating payment terms with you. And because that company might see you as a former and possibly future customer, it might be more willing to offer you a deal.

What debt collectors don't want you to know? ›

Debt collectors don't want you to know that you can make them stop calling, they can't do most of what they tell you, payment deadlines are phony, threats are inflated, and they can't find out how much you have in the bank. Furthermore, if you're out of state, they may have no legal recourse to collect.

What are the 11 words to stop a debt collector? ›

If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.

What are the 11 words in the credit Secrets book? ›

Summary: “Please cease and desist all calls and contact with me, immediately.” These are 11 words that can stop debt collectors in their tracks. If you're being sued by a debt collector, SoloSuit can help you respond and win in court. How does the 11-word credit loophole actually work?

What to say to bill collectors to stop calling? ›

If you want a debt collector to stop contacting you, the FDCPA gives you the right to make that happen. Putting your request in writing, via a cease-and-desist letter, is an easy and effective option to stop the communication.

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