What if I Can’t Make My Credit Card Payments?

Did you know that only 25% of Canadians pay off their credit card debt in full each month?

That means 75% of us carry a balance on our credit cards each month. In fact, it’s quite common for Canadians to carry outstanding balances each month on several credit cards, which can result in paying several thousand dollars each year in interest. Many Canadians eventually need credit card debt help.

Consequences of not making minimum monthly credit card payments

If you stop making the payments on a credit card, there will be consequences:

• You may lose entitlement to rewards under the credit card’s rewards program
• Your creditor(s) will attempt to collect money from you
• There will be a negative impact on your credit score and your credit report
• You may experience adverse consequences from the “right of set-off”

If you are worried about the consequences of unpaid credit card debt, your first step is to make a commitment to speak with a Licensed Insolvency Trustee to explore your debt relief options.

Important things to know if you have more credit card debt than you can handle.

1. What are my short-term options if I can’t make my credit card payments?
2. What are my long-term options if I can’t make my credit card payments?
3. How can I manage without a traditional credit card?

Short & Long-Term Solutions for Dealing with Credit Card Debt

In dealing with your debt problem immediately, you will probably focus first on short-term solutions. Here we include ample detail on your short-term options. Long-term solutions, which may resolve your debt problem for good, appear later in the article.

What to do about credit cards

If you are unable to make the payments on your credit cards, you will be faced with some important immediate decisions. These are short-term decisions: ones that need to be made  over the next few days.

1. Stop making payments on all but one or two of your credit cards
2. Stop making payments on all of your credit cards
3. Stop making payments on all your credit cards and obtain a pre-paid credit card

What is the “right of set-off”?

Simply stated, the right of set-off (sometimes called the right of offset) is a financial institution’s right to recover money owed to it by a depositor on an outstanding debt such as a credit card or loan, by withdrawing funds from another account you hold with them or from your account with their affiliate companies. They may do this without prior notice.

“A serious consideration when making the decision to stop making payments on a particular credit card is whether or not you will experience adverse consequences arising from a financial institution’s right of set off. If you obtained your credit card through your financial institution, then that institution or bank will typically be in a position to exercise this right.”

Here is an example. Joan Smith, like many Canadians, deals with only one bank, the ABC Bank, where she has one bank account. She obtained her VISA, her only credit card, through ABC Bank. Furthermore, she has her paycheque and her government baby bonus payments direct-deposited into her bank account at this same bank.

Joan pays her rent and her car monthly car insurance using a Pre-Authorized Debit on her bank account at ABC Bank. She also pays a number of monthly utilities – cable television, internet, and cell phone bills – using a Pre-Authorized Debit on her ABC Bank VISA, which has a $10,000 limit. She currently has $800 in her bank account at ABC Bank, enough to cover next month’s rent. This month, her minimum monthly payment on her ABC Bank VISA is $200. She cannot afford to make this payment because she needs to pay her rent as well as some unanticipated car repairs. 

If Joan Smith does not make her $200 minimum monthly payment on her credit card, ABC Bank will be in a position, under the right of set-off, simply to take $200 from her ABC bank account and use it to make her minimum monthly payment on her ABC Bank VISA. In order for Joan to avoid this, she needs to either (1) close her bank account at ABC Bank or (2) withdraw the $800 from her bank account at ABC Bank. Because ABC Bank is now in a position to exercise a right of set-off against Joan, no money on deposit at her bank account at ABC bank account is safe.

How can I avoid being affected by the right of set-off?

Ideally, Joan should do the following as soon as possible:

• Close her bank account at ABC Bank or withdraw all or virtually all of the money she currently has on deposit in that account
• Open a new bank account at another financial institution
• Deposit some money into her new bank account at her new financial institution
• Contact her employer and arrange to have her paycheque deposited into her new bank account
• Contact the government and make arrangements for her baby bonus payments to be deposited into her new bank account
• Contact her creditors to whom she was making monthly payments using Pre-Authorized Debit payments and provide them with authorization for Pre-Authorized Debit payments from her new bank account
• Contact her creditors to whom she was making monthly payments using Pre-Authorized Debt payments using her ABC Bank VISA – and make alternative arrangements for paying these creditors

The pre-paid credit card: an alternative to a traditional credit card

If you have credit card debt and stop making payments on your credit cards, the accounts will be suspended. How will you rent a car, book a hotel room, or make an online purchase in the future? Fortunately, today there are pre-paid credit cards which can be very helpful if you are no longer able to use traditional credit cards.

1. Who can benefit from a pre-paid credit card?

You might want to consider getting a pre-paid credit if you fall into one or more of the following categories:

• You are experiencing difficulties making your payments on your credit card
• You are experiencing problems making payments on your personal loans or lines of credit
• You owe money to Canada Revenue Agency (CRA)
• You have outstanding judgments against you
• You owe money to creditors
• You are using your credit cards to make purchases that you cannot afford to make

2. What is a pre-paid credit card?

A pre-paid credit card is similar to a traditional credit card and is used the same way. You can use a pre-paid credit card for car rentals or booking hotel rooms, or to make recurring payments such as your monthly internet, cable television, or cellphone bill. Unlike traditional credit cards, a pre-paid credit card does not provide you with access to actual credit; you must first put money on the card. As you use the pre-paid credit card, the balance on the card runs down. Most pre-paid credit cards can be “re-loaded” (there may be a fee for this).

3. Why can a pre-paid credit card be a debtor’s best friend?

You cannot go into credit card debt with a pre-paid credit card.

Obtaining a pre-paid credit card can be very helpful if you can no longer make the payments on your traditional credit card, for two reasons:

• a person with bad credit or no credit history can obtain a pre-paid credit card
• some pre-paid credit cards can shield you from your creditors, as it is very hard to trace details of the card or how much money you have loaded it with

If you owe monies to CRA or other creditors, particularly creditors with judgments against you,   a pre-paid credit card can be very useful because many such cards do not require you to have a bank account. Ideally, if you owe monies to CRA or other creditors, then you may want to avoid having monies on deposit at a financial institution where, at some future date, your funds might be subject to seizure.

You can, for example, obtain a pre-paid Titanium VISA credit card at a Money Mart, or prepaid VISA or Mastercard at Canada Post.

The difference between secured and unsecured credit cards

There are two types of traditional credit cards: secured and unsecured. Both offer easy access to credit, a convenient way of paying for many goods and services, and possibly  rewards programs. Secured and unsecured credit cards, however, are very different when it comes to the credit card company’s rights when a consumer fails to make their payments.

In the case of a secured credit card, the money advanced to the consumer via the credit card is secured against real property the consumer owns. Thus, the credit card company has collateral it can go after in the event the cardholder does not make his or her payments.

The most common collateral used on a secured credit card is the cardholder’s home. Some Canadians have signed a Master Credit Agreement with a Canadian financial institution, under which the consumer receives access to a certain amount of credit in exchange for collateral, typically a mortgage on the consumer’s residence.

If a credit card company issues a credit card to a consumer and does not take some kind of security interest or collateral, then the card is an unsecured credit card.

Many credit cards in Canada are unsecured. These tend to have higher interest rates than secured credit cards. In the event that a consumer with an unsecured credit card stops making payments, the credit card company has no collateral to look to in order to recover its monies. Therefore, the company will use other methods.

How Unsecured Consumer Creditors Deal with Late Payments

Large creditors in Canada – financial institutions, credit card companies, retailers, and utilities – employ similar strategies when collecting unsecured consumer accounts.

The purpose of this section is to describe how unsecured creditors, more specifically large creditors, attempt to recover monies owed to them. The comments contained in this section might not apply to small creditors like your dentist, veterinarian, or lawn care company, nor to governments, which often have extraordinary powers when it comes to collecting monies owed to them.

For the first three to six months that your account has not been paid, staff at your creditor’s in-house collection department will attempt to call you requesting payment of your credit card debt. During this period, they will likely mail you written notices demanding payment. If you do not pay your account, they will proceed to more aggressive methods.

Lawyer’s letters

In some cases, after your account has been overdue for a few months, you might receive a generic-looking letter from a lawyer demanding payment on behalf of your creditor. If you receive a demand letter from a lawyer within the first six months, odds are it is a mass-produced, computer-generated letter and no lawyer has actually looked at your file. These letters from lawyers are used to intimidate consumers – and they are often effective at generating payments!

Strategies when accounts are 6 months + overdue

Once your account has been unpaid for six months or more, your creditor has several options and will do one of the following:

• Continue collection efforts using its in-house collection department
• Hire a collection agency to collect your account on a commission basis
• Sue you
• Sell your outstanding account

Your account could be assigned to a collection agency

If your account remains unpaid for more than six months, then at some future date your creditor might assign your outstanding account to a collection agency for collection.  Read our article to find out “What can collection agencies to do me?”

Large creditors have tens of thousands, and in some cases, hundreds of thousands of outstanding accounts. The most cost-effective way for a creditor to make money on its portfolio of bad credit card debt is to simply farm it out to one or more collection agencies on a commission basis. Here are the three primary activities of collection agencies:

• Attempting to locate current contact information for debtors (also called “skip tracing”)
• Phoning debtors and making demands for payment
• Sending collection notices to debtors by mail and making demands for payment

Can a collection agency sue me on behalf of a creditor?

Suing debtors is not a common activity for collection agencies. Researchers have estimated that collection agencies across Canada sue only about one in 10,000 accounts assigned to them for collection.

The fact that collection agencies do not often sue people does not prevent them from threatening to sue debtors. It is very common for collection agencies, collectors employed by collection agencies, and lawyers working on behalf of collection agencies, to threaten legal action when in fact they have no intention of proceeding.

Other important notes about collection agencies

• You may be able to take action to stop calls from collection agencies – and in some instances, creditors, debt buyers and law firms
• A creditor can only assign your outstanding account to one collection agency at a time
• Creditors will often assign an outstanding account to one collection agency for several months, and then recall an account and assign it to another collection agency
• Some law firms in Canada operate in virtually the same manner as a collection agency
• If your debt remains unpaid for more than six months, a collection agency representing your creditor might be prepared to negotiate a one-time payment for less than one hundred per cent of the outstanding balance; typically, the older your account the more approachable a creditor might be

Can you be sued by your creditor?

If you owe monies to your creditor and have stopped making payments as agreed, there is a chance that your creditor will sue you. However, launching a law suit isn’t free – your creditor will incur significant professional and administrative expenses. It is possible for a creditor to sue a debtor and not to recover a penny from them. Your creditor will be much more inclined to sue you if they are confident the odds are high that they will actually recover monies from you.

1. When might your creditor be inclined to sue you?

Your creditor might sue you under the following three conditions:

• The dollar amount owing is significant enough
• The relevant limitation period (“statute of limitations,” which varies from province to province) on the debt has not expired
• You own real property in your own name

Most large creditors in Canada will not sue regarding outstanding accounts of less than $4,000. This threshold for suing could be significantly higher depending upon the creditor.

Creditors are not likely to sue consumers if the relevant limitation period, or “statute of limitations” has expired – such a suit would not likely succeed.

Creditors are much more likely to sue when the debtor owns real property – a house, townhouse, condo, cottage, farm, or rental property – in his or her own name. In this scenario, a creditor can sue the debtor, obtain a judgment against them, and place a lien on the debtor’s real property. The lien helps to ensure that when the debtor sells or refinances the property, the creditor will be paid from the value realized.

2. When might your creditor not be inclined to sue you?

Creditors do not typically sue accounts in the following situations:

• Where the unpaid account is less than $4,000 or $5,000
• Where the account has been unpaid for less than six months
• Where the unpaid account has aged to the point that the relevant
• limitation period in the province where the debtor lives has expired
• Where a collection agency is currently attempting to collect the account
• Where there is no reasonable likelihood that the creditor can recover monies from a consumer
• Where the creditor is not living in Canada
• Where the creditor cannot locate the debtor

3. What will a creditor do when it intends to sue you?

Your creditor typically screens its inventory of unpaid accounts and separates them into two categories: files it wishes to sue, and the remaining files (the majority of files). The remaining files are assigned to one or more collection agencies for collection.

In event that a creditor wants to sue an account, it might do one of the following:

• Use its in-house legal department to sue the file
• Farm out the lawsuit to one or more lawyers specializing in suing unpaid accounts
• Farm out the lawsuit to one or more paralegals specializing in suing unpaid accounts

Your creditor can also sell your outstanding account to a collection agency or debt purchasing firm

The creditor that originally provided you with goods, services, or credit can be described as your original creditor. It is possible to have a creditor who is not your original creditor. This situation arises if your original creditor sells your outstanding account to another firm. In the event that your outstanding account is sold, the debt buyer steps into the shoes of your original creditor.

As a general rule, accounts outstanding for less than six months are not sold. And, the major chartered banks in Canada rarely sell their outstanding accounts, regardless of how long the accounts remain unpaid.

If you owe monies to a non-bank creditor, the odds that your outstanding account will be sold typically increase as your account ages. A handful of creditors in Canada sell their accounts when they are only six months in default. However, the majority of accounts in Canada that are sold to a debt buyer are more than three years old.

Unpaid consumer accounts are a commodity like fruit: the older the accounts, the less they are worth. When a creditor sells debt that is more than three years old, the debt might be sold for less than a penny on the dollar.

There are two categories of debt buyers:

• Collection agencies
• Debt purchasing firms

Some collection agencies, aside from their primary business of collecting accounts on behalf of other creditors, also purchase inventories of overdue accounts.

There are also companies, known as debt purchasing firms, whose sole business activity is purchasing outstanding accounts. Unlike collection agencies, debt purchasing firms do not collect monies on behalf of other creditors.

The company purchasing your debt –  regardless of whether it is a collection agency or a debt purchasing firm – has virtually the same options as your original creditor when it comes to what to do with your outstanding account. And, in turn, a debt purchasing firms might farm out their outstanding accounts to a collection agency for collection.

In some cases, debt purchasing firms might collect outstanding accounts using an in-house collection department. A debt buyer might also choose to sue you.

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Your Long-term Options if You Cannot Pay Your Credit Cards

We have discussed short-term options, and what you might experience as creditors try to recover monies from you. It can be very hard going, so we recommend that you turn your attention to long-term (potentially permanent) solutions as soon as you are able.

1. Credit counselling

At a non-profit credit counselling agency, you can enroll in a Debt Management Plan for credit card debt help. In this plan, you repay one hundred percent of your outstanding unsecured consumer debt, typically over four or five years. In addition, you will pay a fee to the non-profit credit counselling agency, typically fifteen percent of each monthly payment.

2. Negotiating settlements with your creditors

Once your accounts are six months or more overdue, it might be possible for you to negotiate a one-time lump sum payment to your creditor, as settlement in full.

Two key factors affect how flexible a creditor might be in terms of a settlement. As a general rule, the older the debt, the more generous a creditor might feel. Also, a creditor might be more inclined to settle if you can demonstrate that you will never be in a financial position to repay the debt in full.

3. Doing nothing, or adopting a “wait-and-see” approach

A consumer can choose to do absolutely nothing in response to his or her debt, especially if he or she is “creditor-proof” – that is, if he or she has no real property, and few assets/little income from which the creditor could realize value. If you choose this route, you can still expect to receive calls and letters frequently from your creditors.

The “wait-and-see” approach is a variation of this option. If you are unable to make payments on your credit cards and if your creditors do not sue you, you may be able to avoid repaying this debt due to the eventual expiry of a limitation period. A consumer who chooses this approach can always use another debt resolution option if he or she is sued.

4. Filing a Consumer Proposal

In a Consumer Proposal, a consumer meets with a Licensed Insolvency Trustee, who prepares a proposal for the consumer’s creditors. The Trustee contacts the creditors and presents the proposal, and the creditors vote on whether or not to accept it. In a the typical consumer proposal, the consumer repays thirty to forty percent of their outstanding unsecured debt by making monthly payments over five years. Other variations are possible, depending on the consumer’s unique situation.

A great benefit of consumer proposals, as opposed to options 1, 2 and 3, is that consumer proposals are legally binding on both the debtor and the creditors. Once the debtor completes the requirements of the proposal, he or she is no longer legally responsible for the included debts.

5. Filing for Bankruptcy

A consumer who does not qualify to file a Consumer Proposal might need to to file for Personal Bankruptcy. In a bankruptcy, the debtor surrenders all their non-exempt property/assets to a Licensed Insolvency Trustee. The Trustee sells (liquidates) this property and distributes its value fairly to the debtor’s creditors.

When the bankruptcy is successfully completed, all or most debts owed by the bankrupt are discharged (see our page, “What Happens to My Debts When I Go Bankrupt in Canada?”)

Bankruptcy can be stressful, but similar to Consumer Proposal, once the debtor is discharged, he or she is no longer legally responsible for the debts included in the bankruptcy.

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Only a Licensed Insolvency Trustee can work with you to file a Consumer Proposal or Bankruptcy – and will be happy to advise on other options as well. Find one in your area today.

You can also learn more from our article, “What Debt Relief Option Might Be Appropriate for You”.