Can Not Paying Debts Cause Legal Problems?

If you're struggling to control your debt, you know the vicious cycle it can become. You used to wonder how you'd ever pay it all off. Now you just worry about making the minimum payment each month.

Perhaps you've resorted to paying one creditor this billing cycle and another creditor the next. But each missed payment is like playing an anxiety inducing game of roulette. You wonder, "is this the time they're going to call?" Soon, that gives way to "what's stopping them from taking legal action against me?"

If this sounds familiar, you'll want to understand the typical process creditors follow to collect outstanding debts. But more importantly, what your rights are and the options available to fix the situation for good.

Phase 1: Creditor Calls

As you begin missing payments, the first step your creditors will usually take is to contact you directly. These interactions may begin courteously enough — inquiring as to why the delay, offering to make payment arrangements, encouraging you to bring your accounts up to date to avoid harming your credit. However, if you miss subsequent missed payments these calls will continue to escalate in urgency, tone and consequence.

Now you begin to worry about potential legal trouble on the horizon.

Phase 2: Collections Agencies

After you've missed several payments, your creditor may choose to assign your debt to a third-party collections agency. These professionals are skilled at doing whatever is necessary within their legal bounds to secure payment from you — including calling you at home and work and contacting your employer.

You'll know this has happened when you've received a letter in the mail — usually followed shortly by a phone call.

Phase 3: (Court) Judgement

If your creditor is unsatisfied by the repayment (or lack thereof) secured by the collections agency, they may decide to take legal action against you to secure a judgement. This is essentially a court order for you to repay the outstanding debt. The creditor may then take steps to enforce this judgement such as garnishing your wages or bank account balances or seizing assets under an execution order. If a creditor registers a judgement against your home, the courts could order the sale of your house to satisfy the debt.

It is important to read these judgements carefully as they can carry hidden costs that are not immediately obvious, such as recoverable legal costs on behalf of the creditor and accruing interest on your outstanding debts.

Know Your Protections

Each province will offer debtors protection on various assets — though what this amounts to varies across jurisdictions. Your exempt assets are the portion of your property which the creditor cannot take away from you through a judgement.

For example, in B.C., debtors have a motor vehicle exemption of $5,000. If your creditor seizes your car as part of a judgement, you may submit a claim to receive the first $5,000 from the proceeds.

It's also important to note that exemption rules are different for arrears in child or spousal support.

Help is Available

If you worry one or more of your creditors may be seeking a judgement against you, a Licensed Insolvency Trustee can help. They will review your entire financial history and explain your options. You may qualify for a Life-Changing Debt Solution such as a Consumer Proposal — which would cease all outstanding judgements and collections activity and allow you to reach a fair settlement payable in affordable fixed monthly payments.

Don't wait until a creditor has taken legal action against you. If you're struggling, contact MNP and take the first step toward your financial fresh start today.