The Four Stages of Debt Collection

2024-03-08  3 minute read

Randy Kobbert

Debt Solutions

Debt already comes with a lot of stress, but slipping into the debt collection process puts even more strain on your financial well-being. These days, debt collection is as challenging as ever. 

During the height of the pandemic, many lenders were flexible with payment arrangements, with some offering deferrals for several months. Today, lenders are more aggressive with debt collection if you find yourself unable to pay your debt for any significant period of time. The exact process the lender will employ to collect on your debt may vary somewhat, but there are certain regulatory standards all lenders follow. Here are the four stages of debt collection you can expect.

woman reading utility bills

Stage 1: A gentle reminder

The first stage occurs when your payments are typically less than 30 days overdue. Many lenders will simply remind you that your payment was missed by including a note on their regular statement, asking that the amount overdue be added to the current payment.

In some cases, you may receive a letter with a softer tone as a reminder. These letters will often assume that there has been some oversight and ask you to correct it.

Stage 2: An aggressive reminder

If you don’t respond to the gentle reminder, you can expect specific letters from your creditors with a much more aggressive tone. For these debts between 30 and 90 days overdue, lenders will typically seek a specific payment arrangement in a letter. You can also expect frequent phone calls.

Many lenders will start threatening to refer your account to collection or even to legal action at this stage.

Stage 3: Collection agency

By stage three, the lender will follow up on their threat of referring your debt to collection At this stage your lender may refuse to discuss payment arrangements at all because your account has been “written off” and sold to a collection agency.

Specialized collection agencies are even more aggressive with both written and verbal correspondence. Once assigned to collection, your account(s) will remain on your credit report for six years, and threats of legal action from the agent may become an unpleasant routine experience.

You can expect questions relating to your employment/income, assets, and other creditors. At this point, the agent may be seeking the information they need to lien assets or garnishee your income in case a court judgment follows at a later date.

Stage 4: Legal action

At this final stage, you can generally expect that your account has been referred for Court litigation. This begins with a formal demand to repay the full balance within 15 days. A law firm will generally be employed in issuing a Statement of Claim, advising that your account has been set down to be heard in Court and that you have the opportunity to file a Statement of Defense at your discretion.

At the Court hearing date, a Judgment may be rendered against you to repay your debt, as well as interest at a selected rate and any legal costs incurred by the lender. With the Judgment, the lender can compel you to Examination for Discovery, which means you will have to give information under oath about your income and assets. With this information, the creditor may garnishee your income at prescribed amounts and/or register a lien against your assets, eventually being allowed to sell them (subject to Provincial exemptions for specified amounts for some assets, which vary by Province) unless the debt is paid.

You have options — and help

Whether it be from loss of employment, marital separation, or spending beyond your means, debt and the associated interest costs can quickly become unmanageable. The stages of debt collection can become extremely stressful, taking a toll on your health and daily routine.

There are several options to help you resolve financial problems, each with advantages and disadvantages. If your difficulties are not too severe, you could consider creating a budget that includes a debt repayment plan. You could sell some of your assets. Perhaps, you can still work out an informal lump-sum settlement with your creditors, or get a bank consolidation loan. In more extreme cases, maybe filing for Bankruptcy or a Consumer Proposal will be the right path for you. Whatever you choose, you don’t have to do it alone. 

A Licensed Insolvency Trustee is the only debt management professional with the training and qualifications to provide you with all the legal options available at any stage in the debt collection process.

The first step to dealing with debt collection is taking stock of your finances and recognizing that perhaps your debt collectors are more than you can manage on your own. From there, there are life-changing debt solutions to provide you with a helping hand so you can move forward.

Randy Kobbert is a Licensed Insolvency Trustee available within our Lethbridge and other Southern Alberta locations. To learn more about how MNP Debt can help you, contact our local office at 403.380.1600 or toll-free at 310-DEBT (3328).

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