Navigating debt in collections: A step-by-step guide to resolution

Balancing loans and life can be challenging. Between the rising cost of living, your financial obligations, and enjoying your hobbies, loans and credit card debt happen to the best of us. If the debt piles up, the lender may send a debt collector for unpaid credit card debt and other loans you have.

Navigating debt in collections can be a daunting and stressful experience, but with a clear and structured approach, it is possible to regain financial stability. This guide provides a comprehensive, step-by-step pathway to resolving debts that have entered collections.

Whether you are facing collection calls, dealing with credit report impacts, or negotiating settlements, we help you gain the knowledge and tools to effectively manage and overcome these financial challenges.

Understanding debt collection

Debt collection is when creditors or specialized agencies seek to recover unpaid debts from individuals or businesses. When you miss payments on a loan, credit card, or other financial obligation for an extended period, the creditor may either attempt to collect the debt themselves or hire a third-party collection agency to collect on their behalf.

This process can involve various methods, including phone calls, letters, emails, and sometimes legal action. Debt collection can significantly impact a person's credit score and financial health, making it essential to understand and manage debts effectively to mitigate potential negative consequences.

How does debt collection work?

In Canada, debt collection is governed by federal and provincial laws, ensuring fairness and protection for debtors and creditors. When a debtor fails to make payments on a debt, the creditor typically initiates the collection process by contacting the debtor directly to request payment. If these efforts prove unsuccessful, the creditor may engage a third-party collection agency to pursue the outstanding amount on their behalf.

Collection agencies adhere to strict regulations outlined in the federal Fair Debt Collection Practices Act (FDCPA) and provincial consumer protection laws. These regulations govern the conduct of collection agents, prohibiting harassment, deceptive practices, or any form of unfair treatment toward debtors. Collection agencies are required to provide written notice to debtors, informing them of the debt's existence and the creditor's intention to collect.

Once engaged, collection agencies employ various tactics to recover debts, including phone calls, letters, and sometimes legal action. They may negotiate payment plans with debtors or offer settlements for a reduced amount. In cases where debtors continue to evade payment, collection agencies may escalate the matter by pursuing legal action, such as obtaining a court judgment or garnishing wages.

What is a debt collection agency?

A debt collection agency is a company hired by creditors to recover outstanding debts from individuals or businesses who have failed to pay their financial obligations. These obligations include unpaid loans, credit card balances, medical bills, utility bills, or any other type of debt. When a debtor falls behind on payments, the creditor may engage a collection agency to pursue the debt on their behalf.

Debt collection agencies specialize in recovering debts through various means, including phone calls, letters, emails, and sometimes legal actions. They typically operate under strict regulations and guidelines set forth by federal and provincial laws, which govern their conduct in dealing with debtors. These regulations often dictate how and when collection agencies can contact debtors, what information they must provide, and what tactics they are prohibited from using, such as harassment or misrepresentation.

In exchange for their services, debt collection agencies typically receive a percentage of the amount they successfully recover from debtors, known as a commission or contingency fee. Some agencies may purchase debts outright from creditors at a discounted rate, assuming the risk of collecting the full amount owed.

What to do if you receive a notice from a debt collector

If you receive a notice from a debt collector in Canada, it's essential to take certain steps to protect your rights and address the situation effectively:

• Review the notice: Carefully read the notice from the debt collector to understand the details of the debt they are attempting to collect. Ensure that the debt is legitimate and matches any outstanding obligations you may have.

• Validate the debt: Under Canadian law, you can request debt validation from the collection agency. You can ask them to provide documentation verifying the amount owed, the original creditor, and other relevant details. It ensures the debt is accurate and that you are responsible for paying it.

• Keep records: Maintain detailed records of all communication with the debt collector, including phone calls, letters, and emails. Note the dates, times, and content of each interaction. This documentation is valuable if there are any disputes or legal issues regarding the debt collection process.

• Know your rights: Familiarize yourself with your rights as a debtor under Canadian consumer protection laws. Debt collectors must adhere to strict regulations, including guidelines on when and how they can contact you, what information they must provide, and what tactics they can't use.

• Communicate responsibly: If you believe the debt is valid and you are in a position to repay it, consider communicating with the debt collector to discuss potential repayment options. You may be able to negotiate a payment plan or settlement that works for both parties.

• Seek legal advice: If you are unsure how to proceed or believe the debt collector is engaging in unfair or illegal practices, consider seeking advice from a consumer rights organization or legal professional. They can provide guidance on your rights and options for resolving the debt.

• Respond promptly: Ignoring a notice from a debt collector will not make the debt go away and could lead to further consequences, such as legal action or damage to your credit rating. It's important to respond promptly and take appropriate action to address the debt.

Overall, dealing with a notice from a debt collector in Canada requires careful attention, knowledge of your rights, and proactive communication to ensure a fair and equitable resolution of the debt.

Avoiding debt in collections

Debt consolidation can potentially help avoid debt going into collections, but it's not a guaranteed solution and depends on individual circumstances. Here's how debt consolidation can help with eliminating credit card debt and avoid having the lender send your debt to a collection agency:

• Streamlining payments: Debt consolidation involves combining multiple debts into one manageable loan. By consolidating debts, you have fewer payments to manage, making it easier to keep track of your financial obligations and reducing the likelihood of missing payments.

• Lower interest rates: If you can secure a debt consolidation loan with a lower interest rate than your existing debts, you may save money on interest payments over time. It can make it easier to pay off your debts and avoid falling further behind, reducing the risk of debt going into collections.

• Structured repayment plan: Debt consolidation often comes with a structured repayment plan, such as fixed monthly payments over a set period. Having a clear repayment plan for paying credit card debt can help you stay on track and make consistent progress toward paying off your debts, reducing the risk of delinquency or default.

• Improved credit score: Successfully consolidating debt and making timely payments can positively impact your credit score. A higher credit score can make it easier to qualify for credit in the future and may help you avoid situations where debt goes into collections.

How to rebuild your credit score

Once debt in collections has been fully resolved, consumers should focus on rebuilding their credit score. Credit repair vs. debt consolidation are both important for dealing with debt in collections. While debt consolidation makes your unpaid debts more manageable to avoid going to a debt collection agency, credit repair focuses on strengthening your credit report to reduce the effects of having debt in collections.

Rebuilding your credit score after experiencing financial difficulties or setbacks requires time, patience, and responsible financial habits. Here's a step-by-step guide to help you rebuild your credit score:

• Check your credit report: Start by obtaining a copy of your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion), or get a free credit score report from your credit provider. Review the report for errors, inaccuracies, or fraudulent activity and dispute any discrepancies to ensure that your credit report is accurate.

• Pay your bills on time: Payment history is the most significant factor influencing your credit score, so it's crucial to make timely payments on all your bills and debts. Set up automatic payments or reminders to ensure you never miss a due date.

• Reduce your debt: High levels of debt can weigh down your credit score. Focus on paying down your existing debts, starting with those with the highest interest rates or balances. Consider strategies like the debt snowball or avalanche methods to accelerate your debt repayment and reduce your overall debt load.

• Use credit responsibly: Demonstrating responsible credit usage is essential for rebuilding your credit score. If you have credit cards, aim for a credit utilization ratio below 30%. Avoid maxing out your credit cards or carrying high balances, as this can negatively impact your credit score.

• Diversify your credit mix: Having a diverse mix of credit accounts, such as credit cards, instalment loans, and mortgages, can positively impact your credit score. If you don't have a diverse credit history, consider opening new credit accounts responsibly and using them wisely to demonstrate your ability to manage different types of credit.

• Be patient: Rebuilding your credit score takes time, and there are no quick fixes. Focus on practicing good financial habits consistently over time, and your credit score will gradually improve.

• Monitor your credit score: Regularly monitor your credit score and credit report to track your progress and identify areas for improvement. Many credit card issuers and financial institutions offer free credit score monitoring services, or you can use third-party websites or apps to keep an eye on your credit score.

• Consider professional help: If you're struggling to rebuild your credit on your own, consider seeking assistance from a credit counsellor or financial advisor. They can provide personalized guidance and strategies to help you improve your credit score and achieve your financial goals.

Manage credit responsibly and say goodbye to unmanageable debt

Factors like rising living costs and inflation affect credit card debt and loans accumulated through everyday spending. With expert advice and credit management tools from KOHO, we help you say goodbye to your debt and avoid debt collections.

While you spend with a virtual credit card, you can easily manage your recurring bills and track your spending. Responsible credit card use and repayment can help improve your credit score and qualify you for other loan opportunities in the future.

You can also manage your finances responsibly by signing up for our high-interest savings account to build your emergency fund. Your emergency savings are your safety net in unexpected situations to avoid the financial burden and overaccumulation of debt. Earn interest on every dollar saved to maximize your savings.

If you're still worried about running out of funds or don't have emergency savings yet, you can sign up for Cover, our overdraft protection coverage. It gives you up to $250 of interest-free cash advance for extra peace of mind.

We have different plans for spending and saving to help you reach your financial goals and build your credit with KOHO. We also have KOHO for businesses to help you manage your business finances and grow your operations.