This article summarizes the potential consequences of not making a timely payment to one of your creditors.
If you fail to pay an account then your creditor has a host of options in terms of a response to your non-payment. If you have an existing banking relationship with your creditor then you might become the victim of the exercise of your creditor's right of set-off. You should anticipate that your credit score will be harmed and not only will it be more difficult for you to obtain credit but also it will be more expensive. You should expect collection calls and in some instances you might be sued. Furthermore, if your creditor obtains a judgment against you it may proceed to put a lien on your home or garnishee your wages. The consequences will be more serious if you did not make a payment to a secured creditor because your creditor might choose to repossess its collateral.
In this article when I refer to a creditor I am referring to medium-size to large-size creditors. I am not referring to small creditors such as your dentist, chiropractor, or physiotherapist. It is much easier to predict the behavior of larger creditors because they are motivated by simple economics and not by emotion.
i. You may become the victim of your creditor's exercise of its right of set-off
Consumers will often open a bank account and obtain a credit card--perhaps a loan, line of credit, and possibly a mortgage--from the same financial institution. If you were to subsequently fail to make a payment on your credit card, loan, line of credit, or mortgage with that same financial institution then you should anticipate that your financial institution will take monies from your bank account and apply it against the monies owing. Your financial institution is entitled to do this because when you opened your bank account your application provides that your financial institution can exercise the right of set-off.
If your financial institution has exercised its right of set-off against you and you want to prevent this from happening again then you should make every effort to either close your bank account or ensure that it has a zero balance.
ii. You should anticipate that your credit score will be harmed
If you fail to make a timely payment to your creditor then you should anticipate that your creditor will report your unpaid account to one of Canada's two credit reporting agencies, Equifax Canada and Equifax. This will result in a drop in your credit score. The lower your credit score the less likely you will be able to borrow money. Furthermore, individuals with poor credit scores pay more to borrow money than individuals with excellent credit scores.
A poor credit score may also have consequences beyond the scope of obtaining credit. Some employers look at a job applicant's credit report and a poor credit score may reflect poorly on a person's character and make it harder to obtain a job with some employers. Prospective landlords might reject a prospective tenant with a poor credit score or insist upon a guarantor.
iii. You should expect collection calls
If you fail to make timely payments to a creditor then you should expect that you will receive collection calls. For the first few months that your account is unpaid these collection calls will likely be from collectors employed by your creditor.
iv. There is a possibility that you might be sued
If you do not pay an account then you face the prospect that your creditor might sue you. Your secured creditor will not sue you because it already has collateral. Your unsecured creditor might sue you because if it obtains a judgment against you then it will gain some extraordinary enforcement remedies that will make it easier to recover monies from you.
If your creditor sues you and obtains a judgment against you then it will be in a position to put a lien on real property provided your name is on title on the property. Furthermore, if your creditor obtains a judgment against you then it can arrange to garnishee your wages subject to limitations on wage garnishments under provincial law. Finally, a creditor that has a judgment against you can send a garnishment notice to any entity--including your bank branch--ordering the entity to pay any monies owing to you to your creditor.
v. A secured creditor might repossess your property if you fail to make payments
If you fail to make payments to a secured creditor--the company financing your car loan or mortgage lender--then you run the risk of your lender taking steps to recover its collateral.
My knowledge of the consequences of failure to pay an account has been gained over twelve years working as a collection agency lawyer and for nine years spent working as a consumer lawyer representing Canadian consumers struggling with debt.
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