Unpaid Credit Card Debt: What Are the Consequences?

Understanding Unpaid Credit Card Debt: Unveiling the Consequences

When faced with unpaid credit card debt, ignoring the problem seems like the easy way out. Nevertheless, this approach can lead to long-term consequences. It’s critical to understand the implications of not paying your credit card debts and explore various solutions to manage them. In this article, we delve into the consequences of unpaid credit card debt, the process of debt collection, and how it affects your credit score. We also consider potential solutions when dealing with unmanageable credit card debt.

The Consequences of Not Paying Credit Card Debt

When you’re unable to meet your credit card payments, it’s not just the overdue bills that cause stress—there’s also the worry about maintaining living costs and the impact on your credit rating. Ignoring your obligations can lead to unwanted consequences, both immediate and long-term.

In Canada, creditors expect regular payments and will exhaust all avenues to recover the money you owe them. If you ignore your bills, this can lead to calls from debt collectors, a drop in your credit score, and other potential consequences.

The repercussions of unpaid credit card debts depend on the situation and the credit card issuer. Possible outcomes include late payment fees, increased interest rates, and negative reports on your credit report. More extreme results could be debt collectors calling you, court action, wage garnishment, or even seizure of your bank account. These consequences typically unfold over time, so the longer you leave your debt unpaid, the worse your situation can become.

The Debt Collection Process

When you’re behind on your credit card payments, your credit card provider will typically send your account to a third-party debt collector if you’ve missed several payments. Each issuer has different internal debt collection periods, but generally, a collection agency gets involved when you’re 90 to 120 days late.

If the debt is substantial, your account may also be turned over to a lawyer for collection. If you continue to ignore your bill, you can expect more aggressive techniques to recover the unpaid account.

Bank Account Seizure

In Canada, most major financial institutions have a ‘right of offset’ written into their credit card agreements. This clause allows them to use money that you’ve deposited in a bank account with them to pay off an outstanding debt you owe. This only happens if the credit card debt is owed to the same institution where you bank.

For instance, if you have a TD Bank Visa and a chequing account at TD, TD can legally seize money from your bank account up to the full amount owing on your credit card, including interest and penalties. They can do this without your consent, without informing you first, and regardless of the amount of money in your account.

Legal Action and Lawsuits

Credit card companies can sue you to recover outstanding charges. However, lawsuits are expensive and time-consuming, so suing for non-payment typically only occurs if you owe several thousands of dollars. Also, the relevant statute of limitation period on the debt must not have expired.

If you’re being sued for credit card debt, you will receive a Statement of Claim. Ignoring this notice or losing in court means your credit card provider may be granted a Judgment Order confirming that you owe the debt. This order gives the credit card company, or their collection agent, the ability to pursue harsher means to collect money, such as garnishing your wages or freezing your bank account.

Garnishment Orders

Once they have a legal court order, any credit card company can get a garnishment order. They can ask your bank to seize money from your bank accounts and direct those funds to them for payment. With a wage garnishment, a portion of your pay is deducted until the debt is paid in full. The only way to stop a wage garnishment or unfreeze a bank account is to pay the debt, file a consumer proposal, or file for bankruptcy.

Dealing with Debt Collection Agencies

When a company decides they can’t recover your debt, they will write off your account and hire a collection agency to pursue payment. This agency may receive a commission or may buy the debt for pennies on the dollar.

Before a debt collector can contact you, they must send a private letter by mail or email outlining how much you owe, who the original creditor was, and the name and contact information of the collection agency demanding payment. Once this letter is sent, you can expect calls to begin.

Debt collectors often use aggressive tactics to get you to pay. If you’re receiving multiple calls about credit card debts you can’t afford to pay, it’s crucial to know your rights and understand what a collection agency can and can’t do.

Statute of Limitations on Debt Collection

The statute of limitations for debts in Canada varies by province, from 2 years to a maximum of 6 years. For example, in Ontario, you cannot be sued in the courts for an unpaid unsecured debt 2 years after the date of last activity, which is usually your last payment date or the last date you charged something on your card.

However, a debt collector can continue to call to collect on an old debt, even one that has been removed from your credit report. While they can no longer pursue you in the Canadian courts, they can continue to demand payment as the debt never goes away unless it is paid, or you file for bankruptcy or a consumer proposal.

Unpaid Credit Card Debt and Your Credit Score

There’s no denying that late payments significantly damage your credit rating. The extent to which late or missed payments affect your credit score depends on several factors, including the size of the payment or outstanding debt, how overdue the payment is, how many late payments you have, and what your current credit score is.

If you have a credit score over 800, one late payment can drop your score by 30 points or more. If you have a low credit score, an additional late payment will have a smaller impact, but it will take a long time to recover from a recurring history of missed payments and accounts in collection.

Managing Unpaid Credit Card Debt

If you’re significantly behind on your payments and can’t afford to pay off credit card debt on your own, you still have options. You can try making repayment arrangements, negotiating a debt settlement, considering a debt management plan (DMP), filing a consumer proposal, or even considering bankruptcy.

Understanding these options and seeking help to clear your credit card debt is vital for your financial health. Remember, unpaid credit card debt can have serious consequences, but with the right approach, you can manage and overcome these challenges.

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