Debunking the “Never Pay a Collection Agency” Myth
When faced with calls or letters from a collection agency, some individuals and even business owners might recall a popular piece of advice: “Never pay a collection agency.” In Canada, this advice has gained traction online, with claims that paying a debt collector will hurt your credit or restart the clock on old debts. But is this one-size-fits-all advice actually sound? In this post, we debunk the myths around paying collection agencies, focusing on Canadian laws and practices. We’ll explore the legal implications, how it affects credit scores, and the real benefits or risks for businesses and individuals when deciding whether to pay a collection agency.
Understanding the “Never Pay a Collection Agency” Myth
It’s important to first understand why some people say “you should never pay a collection agency” in Canada. This advice typically stems from a few beliefs or situations:
Belief that Paying Hurts Your Credit: Once a debt is in collections, people worry that paying it off won’t improve their credit and might even extend the time the debt stays on their credit report. In Canada, a collections record can remain on your credit bureau report for six years. If you make a payment, it resets the “last payment” date, potentially prolonging how long the item stays on your report. In other words, paying an old collection could refresh it on your credit file for another six years from the payment date. This leads some to conclude it’s better to never pay at all once it’s gone to collections.
Statute of Limitations: Each province has a statute of limitations on unsecured debt (often 2 years in many provinces, up to 6 years in others) which limits how long a creditor or collection agency can sue you in court for the debt. The clock for this limitation period typically starts from the date of your last payment. The myth arises because if you never pay (and enough time passes), the debt can become “statute-barred,” meaning the collector loses legal power to sue for it. However, making even a small payment can restart the clock on that limitation period. Thus, some say not paying at all will help you run out the clock on potential lawsuits.
They “Bought the Debt for Pennies” Argument: Many collection agencies either work on contingency for the original creditor or buy old debts for a fraction of the value. Some individuals feel that since the agency paid far less than the face value, paying them in full is optional or unfair. This is more of an emotional argument than a legal one – in reality, if an agency owns the debt, they have the same right to collect the full amount as the original creditor did.
Hope That It Will Just Go Away: Another facet of the advice is the idea that if you ignore collections, after six years the account will vanish from your credit report and you’ll be free. Indeed, negative information (like a collection account) won’t stay on your credit report forever – generally it’s removed after about 6 years (sometimes 7 years depending on the province/credit bureau). So, some think ignoring the debt and “never paying” is a strategy to wait out both the credit reporting period and the legal period.
As we’ll see, each of these points has some truth but also critical caveats. Blanket advice like “never pay” can be misleading and risky. Below, we tackle the facts about credit impact, legal consequences, and practical outcomes for both individuals and businesses.
Credit Score Impact: Does Paying or Not Paying Help?
One of the biggest myths is that paying a collection will instantly fix or improve your credit score. The reality is more nuanced:
Damage is Already Done: By the time an account is with a collection agency, your credit report has likely taken a hit from the missed payments and the charge-off. The collection record itself is a serious negative mark, typically rated as an R9 (worst rating) on a credit report, equivalent to a bad debt or even a bankruptcy in severity. This record will remain on your credit report for six years from the date of last activity (which could be the last payment or last charge-off date) regardless of whether you pay it off or not. In other words, paying the collection does not immediately remove it from your credit history. Lenders will still see that you had a debt go to collections.
Paying Resets the Clock (Maybe): As mentioned, if you make a payment on an old collection account, that action may update the “last payment date” and could potentially reset how long it stays on the report. For example, if a debt went to collections and you haven’t paid anything for three years, it would normally be due to fall off your report three years from now (making six years total since delinquency). If you suddenly make a payment now, the bureaus might treat that as new activity and the six-year countdown could start over. This is a key reason people advise not to pay old collections. However, credit reporting policies can be complex: some sources note it’s up to 6–7 years from the first default regardless of later payments. To be safe, assume any payment could extend the reporting period unless a collection agent agrees in writing to remove the item upon payment (which in Canada is rare, as agencies generally update to “Paid” but won’t delete the record).
No Score Boost for Payment Alone: Simply paying off a collection might not dramatically increase your credit score in the short term. The account will still show (now marked “paid” or “settled”), and credit scoring models may continue to treat a paid collection as a derogatory mark. Newer scoring models (and some lender practices) are a bit kinder to paid collections, considering a zero balance collection less risky than an outstanding one. Moreover, any manual review by a lender (such as for a mortgage or business loan) will look more favorably on a collection that has been paid. As one Canadian financial resource notes, settling debts shows responsible financial behaviour, which can positively influence credit over time. In contrast, leaving multiple collections unpaid suggests ongoing financial distress.
Ability to Get New Credit: Even if your score doesn’t jump after paying a collection, the practical ability to obtain new credit can improve. Many lenders (especially mortgage providers or business creditors) will require that outstanding collections be paid off before approving a loan or account. By paying, you at least close the book on that debt – future creditors will see a zero balance and that you took responsibility. An unpaid collection, on the other hand, can be a deal-breaker for credit approvals or might lead to higher interest rates if you are approved.
Bottom line: Not paying might eventually remove the item from your report after many years, but during those years you’ll have a major black mark on your credit. Paying won’t delete the history, but it can stop things from getting worse (no more updates or legal actions) and demonstrates that you’ve cleared the debt. From a credit perspective alone, the myth that “never paying” is better isn’t universally true – it depends on how old the debt is, and your future credit needs. If you’re on the verge of the 6-year mark and don’t need new credit soon, maybe waiting it out is feasible. But if you need a clean credit profile (for a business loan, lease, etc.), addressing the collection is usually beneficial in the eyes of creditors.
Legal Implications of Ignoring a Collection Agency
Can a collection agency really do anything if I don’t pay? This is the million-dollar question. In Canada, the answer is: Yes, they potentially can, but there are limits.
1. Lawsuits and Judgments: A collection agency (or the original creditor) has the right to sue you for the debt as long as it’s within the statute of limitations for that province. If they sue and win, the court issues a judgment confirming you owe the money. Judgments are serious – they often appear on your credit report (separately from the collection item) for another 6 years and signify a legal debt. With a judgment, the creditor gains powerful enforcement options: they can apply for a wage garnishment, meaning a portion of your paycheck is taken until the debt is paid. They can also get a court order to freeze your bank account or seize certain assets. For business debts, a judgment could allow seizure of business property or inventory. Clearly, being sued is one of the biggest risks of “never paying” a legitimate debt.
However: creditors don’t sue in every case. In fact, many collection accounts never escalate to litigation. Smaller debts (e.g. a few hundred dollars) often aren’t worth the legal fees to pursue. Agencies also won’t bother suing someone who truly has no assets or income (sometimes called being “creditor-proof”). If a debtor is unemployed, has no property, or is on social assistance, a court judgment might be difficult or impossible to collect on. This is why some people gamble on not paying – they suspect the agency will write off the debt rather than sue. Indeed, Canadian collection agencies tend to sue only when: the amount is large enough, the debtor has known income/assets, and the debt is within the 2-6 year legal window. But make no mistake: if those conditions are met, legal action can and does happen.
2. Statute of Limitations: As noted earlier, most provinces give a two-year window from the date of last payment for a creditor to start legal action (with some exceptions: e.g., Alberta and Ontario = 2 years; B.C. = 2 years; other provinces like Manitoba = 6 years). If you truly never pay and enough time passes (with no lawsuit filed in that period), the debt becomes legally unenforceable in court. This means even if you’re sued after the limit, you can raise the expired limitation as a defense and the case would be dismissed. Importantly, after the limitation period, they cannot garnish or seize because they won’t have a valid judgment. This is the legal silver lining that fuels the “don’t pay” advice. But remember: if you make a payment or even acknowledge the debt in writing, you restart that clock. Collection agents know this, which is why they may push for a small “good faith” payment or a promise – it extends their window to sue.
3. Continued Collection Efforts: What about just waiting for 6 years until it drops off my credit? Well, even if the agency can’t sue after a certain time, they can continue to contact you (within legal limits) indefinitely to ask for payment. The debt doesn’t “vanish” – you just have a stronger position to refuse once it’s statute-barred. Some agencies will still call or send letters occasionally on old debts, hoping you’ll pay voluntarily. And until the 6-7 year credit-reporting period passes, that debt will hurt your credit and be visible to anyone checking.
4. Business Debt Considerations: If you’re a business owner, note that a corporation being pursued for debt has similar risks – the company can be sued, and if a judgment is obtained, business assets or bank accounts can be seized. If you operated as a sole proprietor or signed a personal guarantee, you are personally on the hook as well. Not paying a business debt can also damage your reputation and relationships. For instance, unpaid invoices sent to collections could lead to loss of suppliers or clients once word spreads. Plus, some business creditors might report to commercial credit bureaus, affecting your company’s credit score. The “ignore it” approach can burn bridges in B2B contexts; other companies may be reluctant to extend you credit terms in the future if they know you defaulted before.
In summary, ignoring a collection agency outright is risky. Yes, there are scenarios where they might not or cannot sue – small debt, very old debt, or you’re “judgment-proof”. But you are betting against potentially severe outcomes. The myth that you can safely never pay often downplays the stress, legal consequences, and financial limitations that come with an unresolved debt hanging over you.
Risks of Not Paying a Collection Agency
Continued Harassment and Stress: Even within legal limits, repeated collection calls and letters are stressful. Ignoring them doesn’t make them vanish. The calls won’t stop simply because you refuse to pay. This can go on for years, and collectors might also contact your friends, family, or employer (only to find your contact info, not to discuss the debt) which can be embarrassing.
Credit Damage: As discussed, your credit stays tainted for up to 6 years (from default) with an unpaid collection. This can impede personal goals like getting a mortgage, car loan, apartment rental, or even certain jobs (some employers check credit). For businesses, bad credit can limit your ability to get financing, business credit cards, or supplier terms.
Growing Debt Balance: Many debts in collection still accrue interest and fees (unless the original contract or provincial law stops it). By not paying, you could owe significantly more later. For example, a credit card debt might continue to pile on interest each month. Some provinces restrict agencies from adding their own fees, but if interest was part of the original agreement, it usually keeps running. This means a $5,000 debt today could become $7,000 later, making any settlement harder.
Legal Action and Extra Costs: The worst-case scenario, as covered, is being sued. If that happens, you’d also likely be on the hook for court costs, legal fees, and interest awarded on top of the original debt. A $5,000 ignored debt might turn into a $5,000 judgment plus a few hundred in court costs and interest, which the court can enforce via garnishment or asset seizure. For a business, a judgment could allow the creditor to levy your accounts receivable or put a lien on property. Legal battles also consume time and possibly require you to hire a lawyer.
Relationship and Reputation Damage: Individuals who never pay legitimate debts might burn bridges with that lender (e.g., you may be blacklisted from reopening an account with that bank or service). For businesses, not paying suppliers or lenders can spread via trade references or industry word-of-mouth, hurting your professional reputation. It may also send a signal to other customers or partners that your company is in financial trouble.
Smart Strategies for Dealing with Collection Agencies (Myth-Busting Takeaways)
If the blanket advice “don’t ever pay them” is too simplistic (which it is), then what should you do when a debt collector comes calling? Here are some best practices for individuals and small businesses in Canada:
1. Verify and Understand the Debt: Always start by confirming the debt is yours and the details are correct. Request a written notice of the debt if you haven’t received one (agencies must send you one outlining the amount and original creditor). Check that the amount matches your records and that it hasn’t passed the statute of limitations. If something is off – for example, you don’t recognize the debt or the amount is wrong – dispute it in writing rather than paying blindly. Never pay a penny until you’re sure the collector has a valid claim.
2. Know Your Rights: Canadian collection agencies are regulated by provincial laws that protect consumers from harassment and unfair practices. They cannot call at all hours, cannot threaten you with actions they’re not legally allowed to take, and cannot discuss your debt with anyone but you (or a co-signer). Knowing this can relieve some fear. You have the right to demand communication in writing only, or to set call times in some provinces. If a collector oversteps (e.g., making threats or calling your workplace after being told not to), you can file a complaint with provincial regulators. Understanding the rules also underscores that while you can’t stop all contact (short of paying or insolvency), you can stop abusive contact.
3. Communicate (Don’t Just Ghost): While you may be tempted to ignore the calls (especially if you believe the myth), a better approach is often to stay in communication – at least to inform the agency of your intentions. Ignoring can escalate the situation. If you absolutely can’t pay, you can tell them that and explain the hardship; reputable agencies might scale back frequency of contact or work with you on a plan. For businesses, communication is key – avoiding a collection agency representing your supplier or lender could push them to sue faster if they think you’re entirely unresponsive. Even if you don’t have the money, acknowledging the debt and keeping a dialogue can buy you time and goodwill.
4. Consider Negotiating a Settlement: Collection agencies often accept less than the full amount owed, especially if the debt is old or you can pay a lump sum. Rather than “never pay,” the smarter play might be “never pay full price.” For instance, a $10,000 debt might be settled for $5,000 if you negotiate effectively. The agency would rather get something than nothing. Make sure any settlement agreement is in writing, and only pay after you have the agreement letter. This way you resolve the debt for a discount. Yes, your credit report will mark it as “settled” (which is slightly less favorable than “paid in full”), but it will still stop further collection activity and show a zero balance.
5. Weigh Insolvency Options for Large Debts: If you owe a lot and truly cannot pay, consider talking to a professional about consumer proposals or bankruptcy (for personal debts) or a proposal/bankruptcy for businesses. In Canada, a consumer proposal can reduce your unsecured debts greatly (often you pay back only a portion) and legally force all collection agencies to stop contacting you once filed. It does hurt your credit (stays for 3 years after completion), but if you’re drowning in debt, it’s an option. Bankruptcy is a last resort but wipes out most debts entirely. These are complex legal processes, but worth considering if the alternative is endless collections and no realistic way to pay. The key is, these solutions involve not paying the full amount, but in a structured, legal way.
6. Businesses: Set Clear Credit Policies: For small business owners dealing with collections (either owing money or trying to collect from customers), have a clear internal policy. If you owe and can’t pay immediately, communicate with your creditor – many will work out a payment plan rather than send you to collections. If you are the one owed money, consider at what point you hand an account to a collection agency. Many experts suggest not waiting too long (for example, after 60-90 days past due for B2B invoices) to involve a professional. The older a debt, the harder it can be to collect. Using collection services sooner can increase recovery rates and avoid having to write off debt as a loss. Remember, written-off debts can still be collected later, and agencies like Vanguard even help recover those, but sooner is better.
7. Case-by-Case Decisions: Ultimately, treat each debt individually. The blanket myth of “never pay” fails to account for context. Ask yourself: Is this debt valid and less than 2 years old? If yes, not paying is risky. Do I have the money to resolve it? If yes, paying might be worth the peace of mind and future creditworthiness. Is the debt very old and small? Maybe waiting it out won’t hurt. Am I going to need a loan or mortgage soon? If yes, you probably want it off your plate (either by paying or settling). By analyzing each situation, you can make an informed decision rather than following generic advice.
Conclusion: Myth Debunked – Paying a Collection Agency Might Not Be Fun, But It’s Often Wise
In Canada’s credit and legal landscape, the advice that “you should never pay a collection agency” is an oversimplification – and following it blindly can lead to serious consequences. We’ve debunked the myth by showing that while in certain scenarios avoiding payment could strategically benefit (old, uncollectible debts, etc.), in the majority of cases ignoring your debts is not a sound strategy.
Paying or settling with a collection agency can stop ongoing harassment, prevent legal escalation, and bring resolution so you can move forward. It won’t instantly heal your credit, but it can position you better for the future. For businesses, resolving debts (either those you owe or are trying to recover via agencies) is part of maintaining a healthy cash flow and reputation. The “never pay” mantra is largely a myth – what really matters is understanding your rights, the timing, and the context of your debt, then making a responsible choice. In many cases, that means working out a payment plan or settlement rather than flat-out refusal.
Remember, the goal is to be debt-free and financially stable. Don’t let a myth jeopardize your finances. When in doubt, seek professional advice – talk to a credit counselor, insolvency trustee, or legal advisor about your situation. Dealing with debt is challenging, but informed decisions will always beat knee-jerk myths. Facing your collections (with a clear plan) is usually better than ignoring them. The peace of mind you get from resolving a debt – and knowing a collector won’t suddenly take you to court or call you again – can be well worth it.