Receivable/Accounts - Information for Credit and Collection Issues

Wednesday, February 2, 2011

The Collection Agency Legal Department - Fact or Myth? Part I: Should I Be Worried?

So, let’s say you receive a call from a collection agency’s ‘legal department’, or a collection agent threatens to take legal action against you for an unpaid debt.

Honestly speaking, unless you owe over $1000 for a debt, it is cost-prohibitive to take legal action against you. In Ontario, to issue a claim, have it properly served, get default judgment, and then execute on it via a garnishment, the legal costs will be approximately $300. So unless your debt is significant, the cost of securing a judgment outweighs the amount owed.

That being said, I have had a number of clients that demanded I take legal action on their $400 file, and I’ve seen $10,000 accounts that simply aren’t worth the cost of going down the legal road, because the debtor is already being garnished, is unemployed, or the like. Now with the 2002 Limitations Act in Ontario, a lot of creditors are getting judgments just to secure their debt beyond the two year mark.

Many clients will have judgments prior to listing their account with a collection agency. Any order by the Ontario Housing Rental Tribunal can be transferred to the small claims court for a small fee and then acted on (with a wage garnishment, for example).

For a collection agency to threaten to take legal action, they must have permission from the client to potentially take that action. Many agencies have contracts with their clientele that either allow blanket legal action, or the ability to request legal action on a file. But again, that will cost someone (either the agency or the creditor) $300+ in legal fees.

So, the short answer to part one of this article is: if you are being threatened with legal action over an $80 video rental account, no, you shouldn’t be worried. It's ludicrous (and likely illegal) for anyone to suggest you are going to court over $80. That being said, if you owe a significant four-figure amount of money to a creditor, and the agency knows you are gainfully employed or have liquid assets, the odds of legal action go up.