The 4 Stages of Debt Collection
As most Canadians have some form of debt, a significant number of people will be subject to debt collection services at some point.
Whether you accidentally forget to make a payment or you’re struggling to make ends meet, it’s easy to get caught up in a debt spiral.
Although dealing with collections agents can seem difficult, the process is far less stressful if you understand exactly how it works.
By identifying the 4 stages of debt collection, you can determine how to respond to collections activity.
Furthermore, you can establish where you are in the cycle and find a way to deal with your debts effectively.
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Stage 1 typically occurs when a payment is overdue but is not more than 30 days late.
In most cases, the lender will send you a reminder in the mail.
You may also receive a phone call from the lender, normally asking if you’re aware that a payment has been missed.
However, if you’re signed up for online banking and/or text alerts, you may receive an electronic notification too.
If you make the payment as soon as you receive the reminder, it’s unlikely that any further action will be taken.
Although a missed payment is recorded on your credit file, it isn’t particularly uncommon for people to miss one or two payments over a long period of time.
If your payment is late by more than 30 days but less than 90 days, you’ll move to stage 2 of the collections process.
Again, you’re likely to receive mail from the lender and, this time, it’s probably going to be a little more formal.
In most cases, lenders will ask you to get in touch if you’re having difficulties managing your debts and they may ask you to enter into a payment agreement.
This means making reduced payments for a specific period of time.
As well as receiving mail, it’s highly likely that your lender will attempt to contact you by phone.
Often, people receive regular calls until the issue is resolved, so don’t panic if this happens to you.
At stage 3, your lender’s communications may seem more aggressive.
Typically, lenders will indicate that they are ready to start court proceedings if the matter isn’t resolved swiftly.
In addition to this, lenders may be preparing to sell the debt to a collections agency, or they may have already done so.
Once your debt has been sold to a separate agency, you are liable to pay them what’s owed.
However, sometimes agencies will act on behalf of the original lender, so do check who owns the debt before you make any payments towards it.
Letters and phone calls will come more frequently throughout stage 3 and it’s easy to feel overwhelmed.
If your debt does get passed to a collections agency, it’s going to be recorded on your credit file for a period of six years and the agency will ask you to provide details of your income and expenditure so that a payment plan can be arranged.
In addition to this, they may begin the process of having a charge or lien placed upon property or asking for your wages to be garnished so that they can recoup what they’re owed.
If a debt reaches stage 4 of the collections process, it’s moving ever closer to litigation.
This means the owner of the debt will take you to court for non-payment.
Before this happens, you should receive a formal demand to repay the debt in 15 days.
If you can’t or don’t do this, you may receive a letter informing you that your lender is taking you to court.
This will also tell you how you can file a defence to the claim and what steps you need to take in terms of the court procedure.
A date for a court hearing will be set and you will need to attend.
You are permitted to have legal representation on the day, or you may represent yourself if you are unable to pay for a lawyer.
If the lender can prove that you owe them the funds or if you don’t dispute the claim, a judgement may be issued against you.
In addition to this, it’s likely you will be ordered to pay the debt at a set amount every month, as well as any costs the lender has incurred.
You may be required to give details of your income and expenditure under oath while you’re at court.
Furthermore, the lender may ask the court to order that funds are taken from your wages and redirected straight to them.
Handling the 4 Stages of Debt Collection
As you can see, managing debt problems gets more stressful as time goes on and the negative impact on your credit file gets worse over time.
By dealing with debt issues quickly, you can stop the collections process and ensure your debt never gets beyond stage 1.
Even if you’re unable to make payments at the pre-agreed rate, it’s important to take a proactive approach to debt management.
Although it may be tempting to ignore correspondence from lenders, this won’t make the problem go away.
In fact, it’s likely to hasten the speed at which your account moves through the 4 stages.
If you’re having trouble managing your debts, Bankruptcy Canada can help.
By speaking with a licensed insolvency trustee, you can find out what debt solutions are available to you.
When you find the right way to resolve your debt problems and you broker an agreement with your creditors, collections activity should cease, which will certainly be a welcome relief.
To find out more now or to speak to someone about your financial circumstances, contact Bankruptcy Canada today on (877) 879-4770.
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