Collections Legal Action: What to Expect When Facing Debt
Collections legal action occurs when a creditor or collection agency takes formal legal steps to recover unpaid debts. In Canada, ignoring unpaid debts or failing to negotiate repayment can escalate rather quickly, potentially leading to court judgments, wage garnishments, or asset seizures. Understanding the legal process, your rights, and your options is critical if you’re facing collections legal action. This article explains what collections legal action entails, how to respond effectively, and how to protect yourself from severe financial consequences.
What is Collections Legal Action?
Collections legal action refers to the process by which a creditor or collection agency files a lawsuit against a debtor to recover an unpaid debt. In the case of tax debt, this involves the CRA’s collections department taking formal legal steps to collect on the debt owed to them. This is typically a last resort when other methods, such as calls, letters, and negotiations, fail to resolve the outstanding balance. Legal action can result in a court judgment, granting the creditor the right to enforce repayment through various means.
Steps in the Collections Legal Action Process
1. Negotiating
The CRA will attempt to collect on the debt in a reasonable time frame (either 6 or 12 months depending on the type of debt), and will attempt to come to a mutually agreeable payment plan with the debtor.
2. Notice of Legal Action
Before filing a lawsuit, creditors or collection agencies often send a final demand letter. This letter serves as formal notice that legal action will commence if the debt is not resolved. While not mandatory, it’s common practice to issue this notice as a last attempt to settle the debt out of court.
In our case, the CRA will commence legal action with a formal letter, outlining the next steps they are likely to take, along with a timeline to respond (normally 14 days), before they commence legal action.
3. Legal Action
If the letter is not responded to, or is responded to, but not to the CRA’s satisfaction, they will commence legal action. This can include property liens, garnishment of wages, freezing bank accounts, and in extreme cases, asset seizure.
Consequences of Collections Legal Action
Legal action in collections can have serious financial and legal consequences for debtors, including:
1. Court Judgments
A court judgment establishes that the debtor owes the specified amount to the creditor. This judgment can remain on the debtor’s credit report for up to six years, negatively affecting their credit score and financial reputation.
2. Wage Garnishment
A creditor with a court judgment can seek a garnishment order to deduct a portion of the debtor’s wages directly from their employer until the debt is repaid. The CRA as mentioned can also obtain court orders regarding the debt.
3. Bank Account Seizure
Creditors can obtain a court order to freeze and seize funds in the debtor’s bank account to satisfy the debt.
4. Property Liens
If the debtor owns property, the creditor can place a lien on it. This means the debt must be paid before the property can be sold or refinanced.
How to Respond to Collections Legal Action
Ensure you respond in a timely fashion to all CRA letters and correspondence. The CRA is less likely to take legal action when a Taxpayer is actively working with them to resolve the matter. Ensuring an open line of communication while providing the information requested will help to ensure no legal action is taken.
How a Lawyer Can Help
A lawyer specializing in collections legal action can provide invaluable assistance, whether you’re a debtor or a creditor. They can:
- Review Claims: Assess the validity of the claim and identify potential defences.
- Negotiate Settlements: Facilitate negotiations with creditors to achieve a fair resolution.
- Provide Preventative Advice: Help you structure repayment plans or financial arrangements to avoid legal action.
Conclusion
Collections legal action is a serious matter with potentially severe consequences. Understanding the process, your rights, and your options can help you navigate this challenging situation and minimize its impact. Proactively addressing debts, seeking legal advice, and negotiating with creditors can often resolve the issue without escalating to court.
If you’re facing collections legal action or need guidance on managing debt-related disputes, schedule a free consultation with Rosen & Associates Tax Law. Our experienced team can provide personalized advice and help you protect your financial interests.
Schedule your free consultation with Rosen & Associates Tax Law today.
Michelle Kosarnia
