Why You Should Never Pay A Collection Agency, Ever

How to pay collection agencies

If you don’t pay your bank loan, credit card, or other debt, the lender may decide to send your file to a collection agency.  A collection agents job is to phone you and take whatever measures they decide are necessary to collect the money.  They want to collect because that’s how they get paid.

If you have the money, you may assume it’s in your best interest to pay them, so they stop calling you and so that it clears up your credit.  Those are logical assumptions, and yes, making the phone calls stop is a worthy objective, but does paying a collection agency “clean up” your credit report?

Not exactly, and that’s why it never makes sense to pay a collection agency. Notice I’m not saying don’t pay off your debt, I’m saying don’t pay a collection agency.  The reason is how you decide to pay off your outstanding debt will affect how long it will remain on your credit report.

To fully explain this somewhat complicated issue I’m going to walk through an example:

You lost your job and stopped paying your credit card and it went to collections. One year after you stopped making payments you were back to work and were able to save (or borrow from family) enough money to pay off the debt.

What should you do?

Scenario #1: You Pay The Collection Agency

The obvious option, since you now have the money, would be to pay the collection agency.  However, according to Equifax, Canada’s largest credit reporting agency, once you pay this debt it will remain on your credit report for six more years from the date of payment, because normal credit transactions remain on your credit report for six years.  Even if the collection agency agrees to accept less than the full amount owing, it’s still on your credit report for six more years.

Scenario #2: You Don’t Pay At All

You could simply not pay the debt.  The collection agency will continue to phone you, and the lender may even decide to take you to court and garnishee your wages, so if they know where you work this may not be a good idea.  However, if they don’t take you to court, the debt is automatically purged from your credit report six years from the last activity, so in the example above that’s five more years from when you stopped paying a year ago.  Oddly enough, by not paying, the debt is actually removed from your credit report one year earlier than if you actually paid the collection agency! Now I don’t really recommend this course of action, I just want to illustrate why paying the collection agency is not necessarily the best choice.

Scenario #3: You Do A Debt Management Plan

If you have the money to pay the debt and want to clear it up, you could go to a not for profit credit counselling agency and arrange a debt management plan.  Typically in a DMP you offer to pay the debt in full over a period of time (say three to five years, by way of monthly payments).  However you have the money available now so you could offer to pay perhaps over 12 months. Once the credit card company agrees to the deal, you simply pay it off.  Here’s the key: Because it was a credit counselling payment, Equifax will automatically purge the debt three years from the date paid.  So, by paying through a not for profit credit counsellor, the debt can be removed from your credit report as much as three years sooner than if you paid the debt through the collection agency.

In the first two examples I have assumed you have paid the debt in full.  (With credit counselling all debts must be paid in full; the collection agency may be willing to accept less than the full amount owing).

Scenario #4: File A Consumer Proposal

If you don’t have the funds in full it’s still not a good idea to settle directly with the collection agency.  A consumer proposal covers all of your standard unsecured debts, so whether or not this is a viable option will depend on what other debts you have, and other factors such as your income and other assets.  However, if a consumer proposal is a viable option for you, you may be able to pay less than the full amount owing, and the proposal is purged from your credit report three years after you make your final proposal payment. Depending on the length of your proposal, this may or may not be sooner than paying directly however again, the benefit here is you are also dealing with all your other debts.

To summarize:

  • If you pay the collection agency directly, the debt is removed from your credit report in six years;
  • If you don’t pay, it’s purged in five years (in this example), but you may be at risk for wage garnishment;
  • Through a not for profit credit counsellor you can pay in full immediately and have the debt removed from your credit report in three years;
  • You can file a consumer proposal and, if you qualify, pay less than the full amount owing and be clear of the debt three years after your final payment.

As you can see, there are really no obvious scenarios where it makes financial sense to pay a collection agency directly.  I’ve illustrated this point with a specific example, and your circumstances may be different, so it would be prudent to consult a financial expert to review your unique situation before deciding on the strategy that’s best for you, but it’s likely that paying the collection agency will not be your best option.

Category: Collection Agencies |

Sep 10, 2014

About J. Douglas Hoyes

J. Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a Licensed Insolvency Trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada's largest independent personal insolvency firms. As an expert in debt management, Doug has been helping people deal with debt for more than 20 years.

Join the Conversation

  1. K

    What is the debt is 5 years old already? If I paid it now does that mean it will remain for another 6 years on my credit report?

  2. J. Douglas Hoyes Post author

    Hi K. Yes, the short answer is debt information remains on your credit report for 6 years from the date of last activity, so if you paid the debt today, the note indicating it was paid would remain for 6 more years. If you did nothing, it is likely that the debt would drop off your credit report in one year.

  3. kathryn

    My husband and I are in a proposal now the payments are 575 a mth. He past in nov. I can not make the payments on my own right now with no job. If I stop paying the proposal what will happen? Can they take my house?

  4. Holly

    So just to clear this up, I have collections owing that I have been making payments on slowly. Barley getting rid of it cause of high interest. The debts have been there five years if not closer, if I stop making payments to them now, then after 5 years they will just disappear like they were never there in the first place?

  5. Holly

    Hello, I would like some feed back on my particular situation. I have collections owing from several years ago when I was just old enough to start my own credit, not knowing how it works and how important it was to maintain good credit, my credit score is in the very low 500’s. I have made payments to several of the debts and the accounts have been closed, like you say they still report on my bureau. There are other open collections currently I believe two of them, that I have been making small payments here and there when I can to keep the collectors at bay, you are saying that if I stopped paying them now after paying them for a while that it would go away sooner then if I pay it? There is one that has a debt litigator emailing me so I am nervous with that one as I don’t want my wages to be garnished. So I think Ill continue to pay that one and settle it. But for my other one would it go away sooner if I stopped paying it? I am 23, I live in Canada Alberta. I have a secured credit card that I always make sure to pay on or before the payment date so that I have a revolving credit that reports good payment history on my bureau and I have a taken out a small loan with Easy-Financial with gross high interest so that I have a Installment credit facility reporting good payment on my bureau, do you think these things will help my beacon score rise? I was paying the credit card for about 8 months with no late payments and my credit score went down? would that be because of the collections? It was 540 when I applied at the credit card and when I checked it 8 months later it was below 500 in the 480’s. I am so confused, I just want to take the right path with my credit so I can buy a home someday. Please share any advise for this situation. Thank you.

    Holly E

  6. J. Douglas Hoyes Post author

    Hi Kathryn. You should contact the company that is administering your husband’s proposal. Without knowledge of the terms of the proposal we can’t tell you what may happen to your house, but the proposal administrator should easily be able to answer that question.

  7. J. Douglas Hoyes Post author

    Hi Holly. It is standard practice for most credit reporting agencies in Canada to automatically purge most data that is more than six years old, because they don’t want old data cluttering up your credit report. So, if there is a debt that has had no activity for more than six years, it will likely be purged from your credit report. You still owe the money, but it would no longer be reported on your credit report.

    However, if there is any activity, such as you making even a small payment, the “clock” starts over.

    Also, if you stop paying a debt it is possible that the creditor will pursue you for the debt, so there are other factors to consider other than just the impact on your credit report.

  8. J. Douglas Hoyes Post author

    Hi Holly. Instead of me trying to determine all of the possible permutations in your situation, I suggest you follow this link to contact an advisor for a no charge initial consultation. They can review all of your debts, and your credit report, and provide you with specific advice to deal with your specific situation.

  9. Eric

    I had a finicial advisor at my bank tell me that the two outstanding debts I “owe” to CBV collection agency would stay on my record permanently, they are from 11/2010 and 09/2010.

    Is she right? Or will they be purged from my account in a matter of months?

    Any info is appreciated, thank you.

  10. J. Douglas Hoyes Post author

    Hi Eric. The financial adviser is not correct. Equifax automatically purges most information from your credit report six years after the date of last activity, so a debt with a last activity date of 11/2010 should purge at the end of 11/2016.

  11. J

    Why one “purged” mean exactly? Does it mean it’s off my credit bureau or does it mean it till there but creditor can not use it against you?

  12. ab

    Hello
    I went through some serious financial trouble in 2007-2009 and ended up owing 120,000.00 between Credit Card debt as well as loans and lines of credit…all unsecured.

    I recently generated a copy of my credit file from Equifax(its been 3 years) and low and behold all my derogatory debt bis now been purged except for one small debi that will purge n August of this year. No reported collections appear on my file other than “soft inquiries” from 3 Agencies. I do get calls weekly but have never answered one in the last 2 years.
    Most of the debts show “Date of last activity” between 2008-2010. This means that the statute of limtations has expired on all debts. How can I get the collection calls to stop? And once the last debt purges in August of this year, my credit file will be clean. Can any of these creditors return to haunt me in the future?
    Thx
    A.B.

  13. Plaz

    Is there not a way to negotiate with the Collection Agency that they remove your credit listing with Equifax immediately after the balance is paid in full, instead of waiting 6 years?

  14. J. Douglas Hoyes Post author

    Hi J. “Purged” means it no longer shows up on your credit report. The debt still exists, so in theory the creditor could attempt to collect it from you (although with the passage of time that becomes increasingly difficult). Once the debt is purged from your credit report it no longer forms part of your credit score, so yes, you are correct that from that point of view it is no longer used against you.

  15. J. Douglas Hoyes Post author

    Hi Plaz. The collection agency reports the facts to the credit bureaus, but they don’t control what gets reported. Credit reports show your debts for the last six years, so even if you pay it off, it will still show up as a debt with a zero balance, and the date it was paid (“the last activity date”). I am not aware of a collection agency having the power to remove an old debt from a credit report.

  16. J. Douglas Hoyes Post author

    Hi A.B. Assuming your facts are correct at the Limitations period has long expired, and by the end of this year everything will be purged from your credit report, the collection calls will eventually stop. One possible option would be to talk to the collectors and ask them to send you a letter stating the amount owed, with a full statement showing when the money was borrowed. You could tell the collectors that you want that information because you believe that the debts are now past the Limitation period. You could also advise the collectors that regardless, you are not in a position to pay. If the collectors understand that they won’t be able to collect from you, they will probably give up and stop calling.

  17. J. Douglas Hoyes Post author

    Hi Darcey. I am not aware of any way to get a credit bureau to remove information from your credit report. Your credit score is an amalgamation of your last six years of activity, so the credit score would be meaningless if old information could be easily eliminated.

    However, since your old debts are now paid, your credit score will improve with the passage of time. To improve it faster, you could obtain new debt, such as a secured credit card, which will build up your credit score.

    There are companies that advertise that they can eliminate old debt and fix your credit report. Unfortunately I am not aware of any such company that is reputable, because only the credit bureaus have the power to alter what they report.

  18. J. Douglas Hoyes Post author

    Hi Dean. As you can see from my answers to the previous two questions, I don’t know of any way to get Equifax to remove old information before the purge period. A better strategy is to work on improving your credit score with new credit, and keeping all of your current obligations current, which would have a quicker impact on improving your credit score.

  19. Greg

    Hi, i have had a debit card and a chequing account on it. Therefore, i went to -2000 $ without having overdraft protection. I paid 400, it got transferred to TCR, so they keep calling me trying to get 1600 back. I talked to their adviser, and he was talking that the time i pay it will remain for 6 years . So how can i go for your scenario 3, so it will last only for 3 years?

  20. jaydin

    I live in Toronto Canada, and am currently trying to improve my credit score. I co-signed a line of credit many years ago. Two years ago the primary borrower file bankruptcy, now the debt is my responsibility and is sitting with a collection agency for a few years. The debt is 4300@$, 1800$ of that amount is from interest accumulated.
    My question is which is the best method to clearing this debt?
    #1- negotiate a settlement and pay off in one transaction.

    #2- negotiate a settlement and pay off over 4-6 months?

    If I pay it off over a 4-6 month period is it possible for the debt collection company to report the payments to the credit bureau to help boost my credit?

  21. J. Douglas Hoyes Post author

    Hi Jaydin. You say that the debt is “sitting with a collection agency for a few years”. How many years? Debts are generally purged from your credit report six years from the date of last activity, so if the debt is five years old, your best option may be to wait one more year and it will purge from your credit report. To find out, get a copy of your credit report from both Equifax and TransUnion to determine the last activity date.

    If that’s not an option, then yes, making a deal to pay them something will result in the debt showing on your credit report as “settled”. That’s not as good as “paid in full on time”, but it’s better than a bad debt. Showing the debt is settled will ultimately restore your credit. There is little difference on your credit report to paying it off in full, or paying it off over 6 months. It’s already a “bad debt”, so unlike a current bank loan where regular payments look good, with a bad debt, the sooner it is dealt with the better.

  22. jaydin

    Thank You for your speedy reply!

    I should have mentioned, in January the bank took a 150$ out of my account towards this line of credit, without my prior knowledge, otherwise in March, it would have been 6 years since the last payment was made on this account. Does this mean I’d have to wait another 6years for it to be purged from the system, even thoe I personally didn’t make the payment to the account?

  23. Anonymous

    I moved to the US and I am losing my home in Canada. The Bank and the CMHC will sell my house and probably sue me for the deficiency. I intend to delay dealing with the unpaid debt when and if I return to Canada (file a Bankruptcy) but won’t do anything as long as I live in the US. Does that sound like a good plan?

  24. Jordan

    I have debt from a cable company and its from 2013 or 2012 if I don’t pay it is this article saying that in 5 years it will basically be “wrote off” so there’s no point in paying it ? I got the amount I owe reduced from 1000 to 500, so I was just going to pay it off.. not sure what to do if it’s still on my credit score and I can’t get a credit card anyways..

  25. J. Douglas Hoyes Post author

    Yes, if you have no money to pay, and there are no Canadian assets to take, your only choice is to delay until you return to deal with it.

  26. J. Douglas Hoyes Post author

    Hi Jordan. Yes, once the limitation period expires, it is difficult for the creditor to sue you. However, the debt may still appear on your credit report. So, if the debt is only $500 and you can afford to pay it, and you don’t want it to appear on your credit report, and you don’t have a lot of other debts, then paying it may help you improve your credit.

  27. MJJ

    If I have a debt owing of $450 and the collections have finally stop calling after a year then send me out a settlement of a 1 time payment of $276. Should I just pay the $276 or just wait longer? Will my credit score increase if I pay it off or will I still have to wait 4.5 years for my score to increase?

    Thanks MJJ

  28. Ken M.

    Hi. My yearly Consumer Disclosure from Transunion shows a collection agency is making frequent Account Review Inquiries. I don’t owe anything, so is this usual? Should I try to get them to stop? Does it affect my credit in any way?

  29. Nikki

    What if a collection agency keeps reporting to Equifax every month that I owe since 2012, would this mean that 6 years would never happen for me, it would be never ending?

  30. Gayle

    I checked my credit score and there is a public record with the date of July 2011 that is unpaid. How bad will that look when I want to borrow or get a credit card, and will it be purged in 2018?

  31. Mark

    Great article. Years ago I ran into some problems and got behind after a lay off; those debts no longer show up on my file so I presume they were, as you noted purged. But I noticed CBV keeps making a lot of inquiries (sometimes 3-5 a month) even though no debt is listed. This recently caused me to be declined for the first credit I had asked for in years.

    I dont want to contact them for fear that initiating contact will restart the clock – I dont even know what they they are inquiring about. Is there a way to get them to stop?

  32. Jan

    Hi there i have a debt in collections with td bank for around 17000 that was last reported in December 2015. It’s now may 2017 almost a yr n half later. Does this mean purge will happen around dec 2021? I was in a accident where I was injured n unavailable to work at the time. I am looking to have this debt somewhat corrected so that my credit file doesn’t look so dismal. My question is do I even bother to go to the creditor or do a CP or go to a not for profit counselor seeing that this loan will start activation this year giving it another 3 yrs to 2020? What’s a year? Or it does matter to show the effort ? Im guessing the score will go up with that three years of waiting I’m now sitting at 694 with transu and 637 with exquifax. My only other revolving cred is a cap1 always paid n up to date. Got in april 2015 at 522 credit score with 2500 cred limit. Paying on time has gotten me to 694. But right now with this debt I now know that no other creditors will even consider me with this debt for credit. Advice pls?

  33. TJP

    Would anyone know if debt from Saskatchewan or credit history from Saskatchewan would affect me in BC or is if you get debt in Saskatoon, that means you have debt Canada wide.

  34. cory

    i know this is a long shot but here goes. i waited the 6 yrs.i lost my job in 2011 and then i moved and forgot about it. i went an got a new bank account 2 months ago and they told me i cant get credit because of past debt. so i thought about it and was like its going to be 6yrs soon i should just wait. i applied for my free credit report from both equifax & transunion, i read them and they both say i have no credit history so it was purged.
    my problem is now that i updated my info im getting calls from a collection agency wanting payment for the past credit card that has been purged from my credit. what do i do?

  35. J. Douglas Hoyes Post author

    Hi MJJ: Debts remain on your credit report for a minimum of six years from the date of last activity, so if the debt is a year old, you could do nothing and in five years it will disappear. Or you could take the deal and presumably the debt will then show as “settled” on your credit report, which is better than “not paid”. The amount is not huge, but I would expect that settling the debt may slightly increase your credit score over time.

  36. J. Douglas Hoyes Post author

    Hi Ken. You could contact the collection agency and ask why they are reviewing your account. It could be that they have you confused with someone else with a similar name. If there inquiries are “soft hits” it won’t impact your credit score (your credit card company probably does a soft hit every few months, so that’s not an issue). If they are doing a full inquiry every month then yes, that will negatively impact your credit score, so you should ask them to stop.

  37. J. Douglas Hoyes Post author

    Hi Nikki. No, once the six years has elapsed, the credit reporting agency will no longer report that debt (which in your example, will presumably occur in 2018).

  38. J. Douglas Hoyes Post author

    Hi Gayle. Without knowing the exact nature of the debt I can’t give specific advice, but in general, yes, after six years debts no longer appear on your credit report, so it is likely that it will be purged in 2018.

  39. J. Douglas Hoyes Post author

    Hi Mark. Contacting them does not restart the clock, so if they are damaging your credit score then your best option is likely to contact them and find out why they are doing checks on you. It’s possible they have you confused with someone else with a similar name, so they may simply correct their records and stop. If not, you could file a complaint with the Ministry of Consumer Services in your province (names vary by province).

  40. J. Douglas Hoyes Post author

    Hi Jan. There are two dates that matter.

    First, there is the Limitations period date, which varies from province to province. In Ontario, that period is two years, so the TD Bank has two years to sue you, which in your example presumably means they can sue you up to December 2017.

    Second, the purge date on a credit report is generally six years from the date of last activity, so in your case, yes, the debt will probably no longer appear on your credit report after December 2021.

    You can consult one of our advisors to determine if a consumer proposal or other options would be best in your situation.

  41. J. Douglas Hoyes Post author

    Hi TJP. As a general rule, credit agencies include all debts from across Canada, so moving to a different province does not eliminate a debt from your credit report.

  42. J. Douglas Hoyes Post author

    Hi Cory. The short answer is that you ask the collection agency to send you a letter giving proof that you owe the money, and that they are authorized to collect it. It’s likely they won’t bother to send you the letter, which should be the end of it. If they do send the letter, then you could call them and advise them that since the debts are long past the limitation period, you will not be paying them. If they sue you (which is highly unlikely), you could show up in court and tell the judge that the debts are very old, and provide proof, and that should be the end of it.

  43. Ad

    I just had a collection agency FDr something call me at work to tell me they that they are working on behalf of CIBC and that I owed them money. I did confirm that they had me on the phone (I don’t know if that means that my debt restarts now). Anyways she fully admitted to me that the debt is from 2011 and that they are the 4 collection agency to own. I guess my questions are a) can they call me at my work (I live in Ontario) b) did my debt restart because I told them they did have the right person on the phone c) because the debt is from 2011 and she fully admitted that on the phone, is there anything they can do against me?… The debt doesn’t show up on my credit burrow but I am scared if they can still sue me and get my wages garnished even though the debt is from 2011.Please help. Thank you

  44. Ted Michalos

    Hi Ad – in answer to your questions:

    a) can they call you at work? Obviously they did. It is generally accepted that a collector can call your employer once to confirm employment. If they actually spoke to you that’s ok – as long as they haven’t called you at work again.

    b) Just confirming that they have reached the party they are looking for is not the same as confirming you owe a debt to CIBC. The call was likely recorded – if you did say something o confirm the debt, “I know I owe CIBC money” that’s different. Think back to what you said…

    c) Ontario has something called the Limitations Act – a creditor has two years from the last time you confirmed the existence of a debt to commence legal action against you or you have a defence in Court that the “time limit” has expired. If they call again, advise them you dispute the existence of any debt and they should either cease and desist or take you to Court.

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