CHAPTER 1
THE BASICS OF THE DEBT COLLECTION GAME
 
 
Before we get into what to do if you’re being hounded by collection agencies or if you’re drowning in debt, it’s important that you understand some of the basics of how debt collection works. This chapter will give you an overview of the process and introduce you to some of the key players.
 
 
PRACTICAL TIP
This book will introduce a number of words and phrases you might be unfamiliar with. I will explain them as I go along, and the glossary at the back also defines each term.
 
 
As you may know all too well, collectors are the people who call you and call you and call you. They are usually very aggressive and they want you to make a payment as soon as possible. A creditor is a company from which you purchased goods or services, or from which you borrowed money, such as Visa. A debtor or consumer is the person who owes the money: you.
 
A bill collector is an individual or an organization demanding payment from debtors – for example, your creditor, a collection agency, a lawyer, or one of its employees. A collection agency is an organization that collects money from you on behalf of others and obtains at least 50 per cent of its revenues from this collection work, such as a traditional collection agency or a law firm that does large-volume debt collection work. We will learn more about bill collectors later in this chapter, but the important thing for you to understand here is that they are not always employed by collection agencies.
 
If collection agencies are calling you, it’s probably about unsecured debt. This is debt for which your creditor has no collateral if you do not pay it, which is why they’re more likely to send those accounts to collections. The most common types of unsecured debts are most credit cards; certain debt typically worth less than $10,000 such as bank overdrafts, lines of credit, and personal loans; certain utilities such as your telephone landline, cellphone, Internet, and cable television subscription; student loans; and outstanding taxes.
 
With a secured debt your creditor has collateral that it can turn to if you fail to repay your account. A good example of a secured debt is a loan you take out to lease or purchase a car. The lender usually puts a lien on the vehicle, making your car the collateral, so that if you fail to make your payments your lender can re possess your car. Similarly, when you purchase a home, your lender puts a mortgage on your property. The property is the lender’s collateral, and if you fail to make your mortgage payments your lender may take steps to repossess your property. Lenders usually insist on becoming a secured creditor for large personal loans or lines of credit.
 
Consumer debt includes debt arising from the purchase of goods and services or from borrowing money from a lender other than the government. The following are not consumer debt: unpaid child support and spousal support, and money owing to the government such as unpaid income taxes and property taxes, fines, and outstanding student loans (except Canada Student Loans obtained between August 1, 1995, and July 31, 2000, in which case your creditor is a financial institution and not the Government of Canada).
 
 
IMPORTANT FACT
This book is going to be most valuable in helping you deal with your unsecured consumer debt (credit card bills, for example).
 
 
In order to deal with your debt situation effectively, you need to be able to identify which of your debts are unsecured consumer debts. One of the things you need to know is whether you have signed a Master Credit Agreement with your financial institution. Without fanfare, over the past several years the banking industry has been quietly reducing its exposure to bad loans on unsecured debt by getting both new and existing customers to sign a Master Credit Agreement. Under the agreement, the financial institution makes a certain amount of credit available to a customer and the customer agrees to provide collateral for this debt – making it secured debt. In most cases the security a banking customer provides is his property – his home, townhouse, or condominium. Many people unwittingly signed these agreements without understanding that they effectively converted some of their existing unsecured debt into secured debt. If you are unsure whether you have signed a Master Credit Agreement with a particular financial institution, you should ask for documentation regarding your loans or sources of credit.
 
Once you’ve figured out if any of your debts fall under a Master Credit Agreement, you might take five or ten minutes to list all of them in Appendix A: “Worksheet: Profile of Your Current Debts.” This will help you to keep track of, categorize, and identify your unsecured consumer debts, those you might be able to avoid paying altogether through something called a limitation period or that you might be able to settle for less than 100 cents on the dollar. As we’ll discuss, it is possible to negotiate incredible deals with some creditors that allow you to eliminate your debt at huge discounts. I spend the majority of my time as a lawyer doing this for my clients. For instance, I have helped clients who owe more than $25,000 to a certain creditor eliminate their debt for less than $5,000.
 
Some other terms you’ll come across in the book relate to this practice. A settlement occurs when a creditor accepts one or more payments for less than 100 per cent of the amount owing as settlement in full. This is in contrast to payment in full, whereby a consumer resolves an outstanding account by paying 100 per cent of the outstanding balance. The vast majority of settlements involve a lump sum payment, which is a single payment, versus instalment payments, which happen over a period of time, usually with postdated cheques.
 
This book contains references to real property and personal property. Real property, also called real estate, includes a house, townhouse, condominium, farm, cottage, or rental property. Any property that is not real property would typically be described as personal property. A car, mobile home, and whatever is not permanently attached to the walls, floors, or ceiling in your residence is personal property.
 
 
WHAT YOU SHOULD KNOW ABOUT GOVERNMENT DEBTS
Although the primary focus of this book is how to deal with unsecured consumer debt, many Canadians also owe money to the government, such as the following:
 
• income tax
• certain Canada Student Loans
• provincial student loans
• government fines, including parking tickets
• overpayment of government benefits
• property taxes
• statutory payroll deductions, provincial sales tax, or GST, if you’re a sole proprietor of a business
 
Before we continue, I should say a word about this kind of debt, because there are some special considerations you should be aware of when you owe money to the government. First, the government typically attempts to recover 100 per cent of the money owing to it – plus interest and penalties – and is unlikely to agree to settlements of less than 100 cents on the dollar. However, it might be possible to negotiate settlements on provincial student loans. And if you obtained a Canada Student Loan between August 1, 1995, and July 31, 2000, your creditor is a private lender, not the Government of Canada, so may agree to a settlement.
 
 
Special Powers Available to the Federal Government to Collect a Debt
The federal government has a number of tools to collect a debt that are not available to any other creditor. Some of my clients have learned about these the hard way.
 
Jim went to his neighbourhood bank branch to deposit his paycheque, pay some bills, and withdraw some cash. The teller informed Jim that he would be back in a minute. Jim observed the teller speaking to his supervisor. When the teller returned, Jim was informed that his account had been “frozen.” Jim was shocked. He then spoke to the supervisor and was given the name and phone number of someone at Canada Revenue Agency (CRA). When Jim phoned the CRA, the representative told him that his bank account had been frozen in connection with personal income tax that he owed.
 
In this situation the Canada Revenue Agency issued a requirement to pay, a collection tool the federal government can use against anyone who owes money to it. Most commonly it will issue a requirement to pay to your financial institution, effectively freezing your bank accounts, but if you have a tenant in your home, it could also instruct your tenant to make her rental payments to it instead of to you.
 
In May of last year, Bill, a recent university graduate, was expecting a nice income tax refund of about $2,500 from the CRA. When Bill received his Notice of Assessment from the CRA he was surprised to learn that he was not going to receive a refund after all because the federal government had clawed it back to help pay off his outstanding Canada Student Loan. The federal government had exercised a statutory right of set-off.
 
 
What You Should Know About Canada Student Loans
There is a lot of confusion among Canadians about their outstanding student loans. This section is not intended to be a comprehensive review of student loans, but it will highlight some of the important issues when dealing with them. First, note that Quebec, Nunavut, and the Northwest Territories do not participate in the Canada Student Loan program. These jurisdictions receive money from the federal government and operate their own assistance programs for students.
 
A person who obtains a Canada Student Loan will typically also obtain a provincial student loan. If you have a Canada Student Loan you have an obligation to begin repaying it six months after completion of your post-secondary studies, although interest will be charged from the beginning of this six-month grace period. Under the Canada Student Loan program a borrower is considered to be in default when his loan is more than three months in arrears, and it will undertake some collection efforts at that point.
 
If you have delinquent student loans, one of the first things you will want to do is determine how many delinquent student loans you have and who the collection agent is for each of these loans. Your primary point of contact regarding your Canada Student Loan should be the National Student Loans Service Centre (NSLSC). Its website is www.canlearn.ca. The centre has two separate divisions, one for students attending public universities and community colleges and one for students attending trade schools, career colleges, and vocational schools. You can also get information about provincial student loans obtained in Ontario, Saskatchewan, Newfoundland and Labrador, or New Brunswick from the National Student Loans Service Centre.
 
 
IMPORTANT FACT
Whenever you are dealing with the National Student Loans Service Centre or an authorized collection agent, it is important that you maintain a written journal summarizing your communications with them, that you retain copies of any correspondence with them, and that they confirm receipt of any written communications from you.
 
 
Relief from Canada Student Loans
If you have a Canada Student Loan that you are experiencing difficulty repaying, you might be eligible for various forms of relief, including these:
 
1. Revision of Terms: A borrower decreases or increases the monthly loan payments or extends the number of months she takes to repay her Canada Student Loan.
2. Interest Relief: A borrower who is experiencing short-term difficulties repaying his student loan is not required to make any interest or principal payments for a period of six months.
3. Debt Reduction in Repayment: A borrower experiencing long-term financial problems might be able to reduce her monthly loan payments to an amount she can afford based on her income.
4. Permanent Disability or Death Benefit: If a borrower dies or becomes permanently disabled, his Canada Student Loan might be forgiven.
 
Anyone wishing to take advantage of these relief options must apply for them, and may or may not be successful. Similar relief may be available under provincial student loan programs.
 
 
THE LIFE CYCLE OF AN OVERDUE DEBT
Let’s say the minimum payment for your MasterCard is due February 10, 2010, and you don’t pay it. Your account is now considered in default. Most creditors employ their own collectors who will attempt to collect a debt for anywhere between three and six months from the date you first default on your payments.
 
If the creditor’s collectors are unsuccessful getting you to pay, the creditor will typically send your account to a collection agency. A collection agency makes money on a commission basis – so the creditor pays it only when you make a payment. This commission is a percentage of the money the agency collects – the rates vary anywhere between 8 per cent and 60 per cent – and typically the longer your account goes unpaid, the higher the commission rate. For example, if you make a $1,000 payment to a collection agency toward your ABC Mart credit card debt and the collection agency is entitled to a 30 per cent commission, it will keep $300.
 
 
IMPORTANT FACT
A creditor will place your outstanding account with only one collection agency at a time.
 
 
The first time your delinquent account is assigned to a collection agency, your account is considered a first assign. At this point some of your creditors might stop charging you interest. Your account will be with this agency for a predetermined period of time, usually between 6 and 12 months. Either one specific collector will be working your account or it will be worked by a group of collectors. It is more likely to be worked by a single collector if it is worth more than $400 and is less than six months in default.
 
If the collection agency is unsuccessful getting you to make a payment, the creditor will take back your account from this original agency and forward it to a new one, making your account a second assign.
 
If you still don’t pay, your creditor may forward your overdue account to several collection agencies, but again only one collection agency at a time. These are called third assigns or in some cases even fourth assigns. It is possible for your account to be a third assign even when it has been a third assign at several different collection agencies.
 
At some point your creditor might simply write off your unpaid account or sell it to a debt buyer or debt purchaser. That usually happens when the debt is more than three years old, although these days more and more creditors are selling debt earlier. A debt buyer steps into the shoes of your original creditor, replacing it. So if you owe $500 on your Bay credit card and this debt is sold to ACME Debt Buyers USA, then you now owe this debt to ACME Debt Buyers USA.
 
There are two different categories of debt buyers: traditional collection agencies and debt purchasing firms that specialize in buying a large number of delinquent accounts from a single creditor. For example, a collection agency might purchase 10,000 accounts from a department store credit card issuer, paying between half a cent and five cents for each dollar of debt. Now when the collection agency collects $1,000 from you, it keeps 100 per cent, rather than just a commission. Specialized debt buying firms, on the other hand, will typically send the accounts they purchase to a collection agency for collection on a commission basis, but a few debt buyers actually employ their own collectors.
 
Somewhere between 50 per cent and 75 per cent of the outstanding consumer debt in Canada is owed to the big Canadian chartered banks, which have been very reluctant to sell any of their debt. Given how much they value their reputations and given how some collection agencies treat people in debt, I am not in the least surprised.
 
And finally, after a certain period of time, you might be able to avoid paying some of your debts altogether. Every Canadian province and territory has what is known as a statute of limitations. Depending upon which province you live in, the limitation period on a consumer debt might expire between two and six years from the date of your last payment. After the expiry of a limitation period, you will have the option of not paying your outstanding account and your creditor will have effectively lost its ability to recover the money from you. We will learn more about this later, and about how you might be able to use the limitation period to your advantage.
 
 
WHO ARE THESE PEOPLE CALLING YOU?
A lot of people tell me they are confused about who is actually contacting them to demand payment of their outstanding account. In the next few pages I will introduce you to the various people you may come across.
 
 
Collectors employed by a creditor
For the first three to six months that your account is overdue, you will likely receive calls from collectors employed by your creditor. Because I represent debtors, I routinely get calls from these collectors myself, and many of them are so rude to me that I can only imagine how rude they are to my clients. I got so mad one day after a call from a collector named Gary that I decided to start recording my phone calls with certain collectors so I could post them on my firm’s website, www.helpwithcollectioncalls.ca. (Unfortunately, Gary never did call me back.) The problem is, except in British Columbia, there are virtually no laws other than the Criminal Code protecting consumers from the bad behaviour of a collector employed by your creditor. They aren’t held to the same code of conduct as collectors employed by collection agencies. So when my clients complain about getting abusive phone calls from collection agencies, in many cases I believe they are mistaken and in fact the caller was a collector employed by their creditor.
 
If you owe money to a finance company, the local branch manager might be knocking on your door demanding payment. There are no laws prohibiting a creditor from doing this, whereas most provinces do have laws prohibiting employees of a collection agency from showing up at your residence to demand payment of a debt. Collection agencies are limited to phoning you and sending you letters demanding payment of an outstanding account.
 
Furthermore, collectors employed by creditors often will not provide you with their first and last names, possibly because anonymity helps them avoid getting in trouble for abusive or unprofessional behaviour. In contrast, most provincial laws regulating collection agencies require individual collectors to be licensed and to disclose their full name during a collection call, once they have confirmed that they are speaking with a debtor.
 
 
Collectors employed by a collection agency
I am a regular guest on a consumer advocacy radio show in Toronto, and often people calling in want to learn more about the kind of person who works as a collection agency collector. I describe the job as similar to commission sales, because most collectors are paid a base salary, plus a bonus or commission. A good collector can make thousands of dollars in bonuses in a month. However, a collector who is having a bad month can find himself fired. Collectors are under tremendous pressure to collect money and this encourages them to engage in bad behaviour.
 
Collectors typically have to be at least 19 years old. About 40 per cent are women. There are no educational requirements whatsoever to be a collector.
 
During my 12 years as a collection lawyer, I came to know hundreds of collectors working at collection agencies. Many of these people are no different from you and me, or your co-workers, and believe it or not many of them are decent people doing a very difficult job. If you are in serious debt, some of these collectors will even connect you with lenders they know so you can get a debt consolidation loan, enabling you to reduce your monthly payments on your existing debt. A few years ago one of my legal assistants showed me a thank you letter she had received from a consumer expressing appreciation for her assistance with resolving an outstanding account.
 
Having said that, collection agencies employ far too many collectors who are unprofessional, unethical, and mean-spirited and who break the law on a regular basis. A few very successful collectors have even filed for personal bankruptcy themselves or have a criminal record for serious offences.
 
Furthermore, collectors know how the debt collection process operates, and you might be surprised to learn that some of them work the system to avoid paying their own debts. They know that “Creditor X” will settle a delinquent account for 50 cents on the dollar after 24 months. Similarly, they know that “Creditor Y” never sues anyone, so they will not pay “Creditor Y” and simply wait for a limitation period to expire so they can avoid paying that debt altogether. Several years ago when I was doing collection work, I approached a collection agency near Burlington, Ontario, proposing that it let me try to collect 200 accounts they were unsuccessful with, as a test of my abilities. Imagine my surprise, and that of the agency’s management, when I discovered that one of these delinquent accounts belonged to one of its own collectors.
 
There are two scenarios in which you will receive a telephone call from a collector working at a collection agency. In the traditional scenario, collectors working a “desk” or a “queue” are assigned to work a specific group of accounts and they will manually dial these debtors’ phone numbers. The older the accounts, the more accounts a collector working a desk may have. A collector might work 75 to 100 accounts a month on first assigns, over 200 accounts a month on second assigns, and as many as 450 accounts on third assigns. A collector working a desk will usually work a specific group of files for a few months before the accounts are transferred to a different collector. If you are receiving calls from a collector working a desk, you will likely receive several calls from the same collector over a number of weeks or months. You might be receiving automated computer-generated calls from a collection agency that is using an expensive piece of hardware known as a dialer. By using a dialer a collection agency can
 
dial thousands of phone numbers in a few hours. If the agency is using an unsophisticated dialer, the recipient will simply receive a pre-recorded message requesting a return call to a particular phone number regarding an important matter. This pre-recorded message will never mention the name of the collection agency, due to laws against disclosing the existence of a debt to anyone but the debtor. If the collection agency is using a sophisticated dialer, when an outbound call is answered by an actual person, the call is immediately transferred to a collector who works in a group of collectors, who will be able to access the file corresponding to the phone number. If you are receiving phone calls from a collection agency using a sophisticated dialer, you might end up speaking to several different collectors during a relatively short period of time.
 
A collector, regardless of whether she is working a “desk” or on a dialer, may at some point have you speak to another collector, typically a more experienced one with a proven track record of obtaining voluntary payments. This is referred to as a double. Collection agencies use doubles to reinforce the importance of making a payment or meeting a payment deadline.
 
 
Lawyers who do debt collection work
You might get confused if you are receiving collection letters or calls from your original creditor or a collection agency and then you get a letter from a lawyer. It is common for both creditors and collection agencies to hire lawyers to send out large numbers of letters demanding payment of a debt on the lawyer’s letterhead – and often the lawyer has no real involvement other than that.
 
A handful of Canadian law practices operate in a very similar fashion to a collection agency. These law firms collect large numbers of consumer accounts, employing staff whose primary function is to make collection calls. Many of these employees previously worked as collectors with a collection agency. The trouble is, a lawyer’s conduct is regulated by provincial law societies, so they face few restrictions when doing collections work, except in British Columbia. For example, there is one law firm that would probably rank between the 20th- and 25th-largest collection agency in Canada, based on revenues. This lawyer’s office may send out as many as 150,000 collection letters to consumers each year.
 
Some lawyers engaged in debt collection work in Canada employ collection techniques that would be illegal if done by a collection agency. A prime example of this is sending what is known in the collection industry as a draft statement of claim, which I would describe as a lawyer’s demand letter on steroids. Basically, it’s a notice saying that a lawyer has prepared the paperwork necessary to commence a lawsuit, and if the consumer doesn’t pay his account within ten business days, he will be sued. Furthermore, the letter contains a form identical to what a creditor would use to sue a debtor in Ontario Small Claims Court. Provincial laws prohibit collection agencies, but not lawyers, from using an imitation court form when collecting a debt.
 
 
UNDERSTAND THEIR TACTICS
Keep in mind that the collector calling you is getting paid to recover money from you, and the more she collects the more money she makes. A collector’s job is not to call you and discuss the weather or the score from last night’s hockey game. The collector’s job is to make you feel uncomfortable, to motivate you to act, and to get you to resolve your account as soon as possible. Collectors are trained to do this. Collectors want you to believe that there will be negative consequences if you do not pay your outstanding account. They want to create a sense of urgency, to make you feel that the debt you owe to their employer’s client has to be paid in the immediate future, before you pay some of your other bills.
 
One of the most effective ways for a collector to persuade someone to pay a debt is to humiliate him during a collection call. Most of the tactics a collector may employ to humiliate you are illegal. Some might call you a deadbeat or a loser. They might threaten to speak to your boss or the human resources department where you work. The collector is sending the message “I am going to make your life hell until you find the money to pay this account.” A collector might also try to appeal to your personal ethics: your honesty and your sense of fair play. The collector might get you to admit that you owe the money and that you do have a moral obligation to repay the debt. If you only knew how dishonest some of these collectors were themselves, you would laugh at the irony of their playing this card.
 
A collector might also make less emotional appeals, such as advising you that failure to pay within four business days will result in a lawsuit. It is important for you to know that the collector is a low-level employee who has no authority to authorize a lawsuit. A collector might get chewed out by her supervisor for being away from her workstation for more than 15 minutes without permission. Any deadline she gives you regarding a lawsuit is just some date she has picked out of thin air and is meaningless.
 
Recently, two senior executives at some of Canada’s largest collection agencies shared a surprising revelation with me. Most, if not all, of Canada’s chartered banks do not give collection agencies prior approval to sue files when they forward their thousands of outstanding accounts. This means that collection agencies working on behalf of major banks must usually seek the client’s permission to sue a particular file. Given the banks’ procedure for suing files, it is doubtful that a collection agency would even request permission to sue in the first place.
 
Large creditors, including chartered banks, credit card issuers, major retailers, and utilities, determine early on whether they are interested in suing a file. If your outstanding account is sent to a collection agency as a first assign, this almost guarantees that you are not going to be sued, especially if your original creditor owns the debt. My best guess is that Canadian collection agencies as a whole sue fewer than one in 10,000 accounts on behalf of major creditors. When you get your first notice or call from a collection agency, particularly if your debt is owed to a large creditor, you might want to go out and celebrate because this means the odds are remote that your creditor intends to sue you. And in many respects, a collection agency and its collectors are impotent unless they are going to sue you.
 
Your odds of being sued are also slim to none if you owe less than $5,000 to a particular creditor, you support yourself on social assistance, your account has been purchased by a debt buyer, or you do not own real estate in your own name and you live in New Brunswick, where garnishments are not available to creditors. Furthermore, your odds of being sued approach zero if you do not own your own home and you have a low-wage job.
 
 
IMPORTANT FACT
In Canada creditors, collection agencies, and collection lawyers routinely threaten to sue consumers when they never have any intention of doing so.
 
 
Despite all of that, it is very common for creditors, collection agencies, or collection lawyers to threaten to sue you if you do not pay your debt within a few days. In the United States this practice is illegal and you could actually sue a collection agency or a law firm for thousands of dollars for doing it. But in Canada it is perfectly legal for them to threaten you with a lawsuit even when they don’t intend to.
 
 
IMPORTANT FACT
Collectors often make false or misleading statements to debtors, which is an illegal practice.
 
 
It is very common for collectors to suggest that you will face other dire consequences if you fail to pay your account in the immediate future. Ontario-based collectors often threaten that they will send a bailiff or Sheriff to a consumer’s residence next week to seize his personal property if he does not pay his debt within 48 hours. They don’t have the authority to do this without a judgment, which they can obtain only after successfully suing you, so it’s an empty threat. One Ontario collector proudly told me the story of how he telephoned a consumer’s wife one morning and told her to put all the couple’s furniture and home electronics equipment out on the front lawn because the Sheriff would be coming by at 5 p.m. to repossess it. Her husband was humiliated when he came home from work that evening only to discover their television, stereo, and living room furniture sitting on the front lawn.
 
My point here is that if you’re feeling intimidated by collection calls, try to maintain calm, because the collector doesn’t have nearly as much power as you might think.
 
 
PROTECT YOUR FINANCES FROM SEIZURE
I’ll end this chapter with an important word of caution: you should be using more than one financial institution. More than half of Canadians do all their banking at just one bank, trust company, or credit union. Ideally, you should avoid having your chequing account, savings account, and RRSP at the same financial institution where you have your mortgage, personal loan, line of credit, or credit card. If you owe money to your bank on a credit card, bank overdraft, personal loan, or line of credit, it might exercise what’s called a right of set-off and seize money from your savings or chequing accounts – without notice – and apply these amounts against your debt. Financial institutions recover significant amounts of money on a regular basis exercising this right of set-off against their customers.