Can a Collection Agency Take You to Court?

Can a collection agency sue you in Canada? The short answer is yes. If you have unpaid debt, your debt collector can take legal action against you. A debt collection lawsuit can recover your unpaid debt, and the court may also grant the collector additional legal fees.

It could go something like this:

You’re sipping coffee at your kitchen table and planning for the day ahead. Suddenly, there’s a knock at your door. You open the door, and a man asks in a stern voice, “Are you Mrs. Jones?” You reply with a nervous “yes” as he hands you an envelope. “You’ve been served,” he announces, and then turns on his heel and walks away.  

Uncertain of what just happened, you open the envelope. It’s a notice of debt indicating you have been served with a Statement of Claim, and you are being sued for credit card debt that hasn’t been paid in quite some time. Panic starts to set in. 

What do you do now? Can collections take you to court? Can you go to jail for not paying debt in Canada? What happens when creditors take you to court? What are your options if debt collectors sue you? We’re here to answer your burning questions!

When Will a Creditor Take You to Court?

While a creditor taking you to court is possible, they rarely use legal action as a first attempt to collect an outstanding debt. There are usually many warnings ahead of being sued, mostly in the form of collection calls and letters. These calls and letters may persist for many months before debt collection agencies try to sue you for the money. 

Creditors are most likely to take you to court when:

• Your debt is high enough to justify the legal expenses
• You have assets or income that can be seized/garnished to repay the debt
• Your debt falls within the statute of limitations period for your province.

Common types of debt can include:

• Consumer Debt
  • Credit cards
  • Personal loans
  • Payday loans
    
    
• Government Debt
  • Student Loans
    
    
• Utility Bills
  • Electric/water bills
  • Phone/internet bills
    
    
• Medical Bills
  • Unpaid medical bills
    
    
• Court-ordered debt
  • Traffic tickets
  • Alimony
  • Child support

How often do collection agencies take you to court over outstanding debt? The answer may vary from one province to the next, as different provinces give creditors and debt collection agencies different limitations on when they can sue for their money.

If you are taken to court, it can be by a debt collection agency acting on behalf of a creditor, the creditors themselves (if they have an internal collections department), or even a third party who bought out the debt from the original creditor.

Can I Ignore a Collection Agency?

Yes, you can ignore a collection agency, but that doesn’t mean you should. It’s never a good idea to ignore creditor communications. So, how can you deal with debt collectors?  

• Always keep in touch, even if it’s just to explain that you can’t make your payments and explain why. 
• You may also consider writing a letter or email explaining your situation, what you expect to happen, and what payments (if any) you can make—and always keep a copy for your records. 
• Return the creditor’s call so they’re aware that you’re trying to keep the lines of communication open.
• Keep a log of your communication with the creditor so you can reference the conversations as well.

Communication with the creditor should be ongoing. You will likely continue to receive collection calls, as unpleasant as they may be, but it’s better to answer them and offer a payment arrangement if possible. You may also get letters marked URGENT, asking for you to call back within a set time frame (e.g. 10 days). Creditors may be willing to work with you so long as you communicate with them—they would much rather be able to collect at least some of their money than risk the chance of you filing a bankruptcy proceeding or having to try to get a judgment in court. Civil proceedings can be costly, and it’s not guaranteed that they will be able to recoup their lawyers’ fees.  

What Happens If You Don’t Pay a Collection Agency? 

Collection agencies can be relentless. They will call, write letters, and sometimes worse in order to try to collect a debt. After all, they don’t get paid unless you pay up. However, they must operate within the law and abide by the rules and regulations set forth by each province. 

For example, in Ontario, there is the Collection and Debt Settlement Services Act, which prohibits entities from harassing consumers in order to collect outstanding debts, whether they owe the debt or not. But if you ignore the collection attempts or refuse to make payment arrangements, you may be taken to court. 

Learn more about debt collection calls in our blog What Can Debt Collection Agencies Actually Do in Canada?

Can You Go to Jail for Not Paying Debt in Canada?

After asking, “Can debt collectors take you to court,” some people might wonder if they could be sent to jail for not paying their debt in Canada. The short answer is “No.” Sources like Bankruptcy Canada highlight that you can’t be arrested for being in debt. There is no “debtors’ jail” in the Canadian justice system.

However, that doesn’t mean that failing to pay debt is consequence-free. For example, after taking you to court, a creditor or debt collection agency might have your wages garnished—taking a portion out of your future paycheques until the debt is repaid. Alternatively, they may place a lien against your property or garnish funds from your bank accounts.

Want to know your debt options? Take our quick and easy debt assessment quiz to find out how you can manage and reduce your debt.

What Is the Minimum Amount That a Collection Agency Will Sue For?

Taking someone to court involves legal fees, time, and manpower, so some creditors and collection agencies might not pursue a court case if the debt is below a certain dollar amount; it simply might not be cost-effective. 

In fact, according to a recent survey of Canadian lawyers, it can cost upwards of $10,000 to file a lawsuit. So, you can see why some creditors might be hesitant to sue over small amounts.

How Long Can a Collection Agency Collect on a Debt in Canada?

How long a collection agency can collect on a debt depends on the province in question, but it varies between two and six years.

Technically, debt collection can continue indefinitely (as long as it doesn’t constitute harassment, which is prohibited as per the Fair Debt Collection Practices Act of Canada). However, Canadian legislation sets a statute of limitations in Ontario and other provinces regarding the amount of time a creditor has to sue you. In Canada, the time starts from the acknowledgment of the debt—not necessarily the last payment date. However, making such a payment can be a form of acknowledging the debt. 

Here is a list of time frames in which a debt collection agency can sue you based on province:

• 2 years from the acknowledgment of debt: Alberta, British Columbia, New Brunswick, Nova Scotia, Ontario, Saskatchewan
• 3 years from the acknowledgment of debt: Quebec
• 6 years from the acknowledgment of debt: Manitoba, Newfoundland, Labrador, Prince Edward Island, and the Territories.

Some collection agencies will continue to try to collect long after the statute of limitations for suing has passed because many people don’t know about it. If you let them know that you’re aware that they can no longer sue to recoup the money, it’s likely they will give up. If they don’t and you feel they are breaking collection laws, you can file a complaint with the consumer protection office in your province.

Don't navigate debt alone. Our credit counselling service provides expert guidance and support to help you get back on track. Discover more now.

How to Respond to a Lawsuit from a Collection Agency

After you’ve been served, you will have the opportunity to file a Defence. This means that you’ll need to go to the courthouse listed on the Statement of Claim and File a Defence within 20 calendar days of being served. 

If you choose not to file a Defence, this means that you have opted to accept the charges against you, and you do not want to dispute them—meaning you will own up to your debt. The creditor will be awarded a Default Judgement and this can result in a lien or seizure of an asset or wage garnishment. 

To respond to a lawsuit, simply follow these steps:

• Read the summons carefully
• File a Defence to fight against the lawsuit
• Propose a solution to settle the lawsuit -OR-
• Demand that the creditor provide evidence that ties you to the debt

To file a Defence, you will need to file a Form 9A (Defence) and attach all of the supporting information you have. In this form, you can admit that you owe the full amount of the claim (or part of the claim) and propose a payment arrangement. 

For example, you can admit to owing a balance of $5,497 and agree to make monthly payments of $300 until the balance is paid off in full. You’ll also need to pay the filing fee and monitor your mail for any correspondence from the Court House. Be sure to always verify the next steps in the process with the Court Clerk when filing a Defence.  

Where Can You Find Help If a Collection Agency Takes You to Court?

The following professionals will be able to provide you with guidance and support during the court process:

• A Certified Credit Counsellor. As a not-for-profit credit counselling agency, Credit Canada's Credit Counsellors can review your situation and help you understand your full financial picture free of charge. We will also guide you towards different options, such as debt consolidation, that will help you move forward without having to resort to bankruptcy.  
• Small Claims Court Duty Counsel Services. These are pro-bono lawyers who help low-income individuals wanting to represent themselves in court; however, you must meet specific criteria to acquire their services.
• A Paralegal/Lawyer. For a directory of qualified professionals, you can visit the Law Society of Upper Canada.  
• Legal Aid. Free legal aid may be available for low-income individuals.  
• JusticeNet. This not-for-profit service helps people in need of legal expertise, but whose income is too high to access legal aid and too low to afford standard legal fees. JusticeNet is currently available to anyone living in Ontario. Visit their website for more info.   

What to Do and What Not to Do When Facing a Collection Lawsuit

Common Mistakes To Avoid

During the lawsuit process, avoid common mistakes, such as:

• Ignoring the court summons
• Missing deadlines
• Admitting liability without the collector providing proof
• Making payments without a written agreement
• Not keeping adequate records

Seeking legal assistance can help you avoid these mistakes, and it may help you settle your debt for less.

Potential Outcomes of a Debt Collection Lawsuit

After a debt collection lawsuit, you could face one of several outcomes. In many cases, you risk losing your assets if you fight the lawsuit in court rather than seek a debt settlement agreement.

You win the lawsuit and pay nothing.

Ideally, you fight the lawsuit and win. This can happen if the creditor has misrepresented your debt in some way, the statute of limitations on your debt has expired, or if your creditor is unable to prove that the debt is yours.

There is a default judgment in favour of the creditor if you fail to respond.

If you fail to respond to a debt collection lawsuit, the court may simply issue a default judgment in favour of your creditor. When this happens, you may be held liable for the full amount of the debt, and the court can grant your creditor the authority to seize your assets, garnish funds from your bank accounts, or garnish your wages until the debt is repaid.

You sign a settlement agreement to settle the debt for less.

While you’ll typically have more bargaining power outside of the courtroom, you may still be able to form an agreement with your creditor to settle your debt for less. If you can demonstrate financial hardship, you may experience greater leniency and achieve a lower settlement.

Creditors garnish your paycheques until the debt is paid.

If you lose your debt collection lawsuit, courts can grant your creditor certain powers over your assets to reclaim the debt. This includes wage garnishment, in which a portion of your paychecks will be automatically deducted to repay the debt.

Creditors seize your assets to repay the debt.

Courts may also grant your creditors the right to seize your assets in order to repay the debt. They can seize a portion of what’s in your bank account or even liquidate your physical assets in order to pay off the debt.

Investigate Your Debt Relief Options

It might be useful to investigate your debt relief options before you are taken to court over a debt (or possibly after you get a judgment against you).

As mentioned earlier, a credit counselling agency can help you with a debt consolidation program—negotiating with your creditors to minimize or eliminate interest and establish a payment schedule that works for your current situation.

However, there are a few other options for debt relief that can help get creditors off your back, such as:

• Getting a Debt Consolidation Loan. You may be able to apply for a loan with a bank to consolidate all of your outstanding debt into a single balance—often with a lower interest rate if your credit is good. This is usually best done before your debts are passed off to a collection agency, though. 
• Filing a Consumer Proposal. You can work with a Licensed Insolvency Trustee (LIT) like Harris & Partners to file a consumer proposal to pay a portion of your balance owed or put off the balance due date. Some creditors may accept consumer proposals if they think they’ll get more money back this way than they would if you filed for bankruptcy.
• Filing for Bankruptcy. This is the option of last resort if you have no hope of being able to pay back your debts. Getting a bankruptcy discharge can get creditors off your back, but there are numerous drawbacks to filing for bankruptcy. For example, it can result in a ruined credit score, seizure of your assets, and even hurt your future career prospects.

Being taken to court by a creditor can be scary and intimidating, especially if you don't know the process or what to do next, and the result can be wage garnishment (which is when collection agencies take money from your bank account). 

Remember, the best way to avoid collection agencies is to make at least the minimum payments on your debts on time. If you can’t do that, speak to your creditors and let them know of your situation. Try to work out a payment arrangement; they usually prefer to get something versus nothing—just be sure to get the agreement in writing!

If you don't want to face this alone or feel you simply can’t manage your personal debts and need some extra help, Credit Canada is here standing by. Give us a call at 1(800)267-2272. All of our credit counselling is free!