Debt
NOTE: Examples provided in this pamphlet are only meant to illustrate general definitions and ideas but are simplified and do not encompass the full complexity of debts and the issues involved.
Debt refers to money that a debtor owes to one or more creditors. A debtor is a person, group, or organization, who owes money. A creditor can be a person, group, or organization, who is owed money by the debtor. There are some reasons a debtor owes money, such as:
The debtor borrowed money from a creditor, who expects the money back.
Example 1: John Doe used a $5,000 line of credit from the bank. John, the debtor, has a debt of $5,000 that he owes the bank, the creditor.
Example 2: John Doe borrowed $10,000 from his sister, Jane Doe. John, the debtor, has a debt of $10,000 that he owes Jane, the creditor.
The debtor borrowed or used something that the creditor expected to be returned or else be compensated for if the debtor lost, damaged, or did not return it.
Example 1: John Doe borrowed a book from the library. The book is worth $20, and John does not return the book by the due date because he lost it and cannot find it. John, the debtor, now owes the library, the creditor, $20 plus any late penalties.
Example 2: John Doe borrowed a $1200 laptop from his friend, James Smith. When James lent the laptop, John agreed that he would return it in the same condition and would pay for any repairs or a replacement if something happened. John drops the laptop, and it is damaged beyond repair. John now owes James a new laptop or the value of a comparable replacement.
Note: Even if John and James did not make an explicit agreement regarding repairs or a replacement, James could potentially file a claim in court to sue John for the loss of the laptop.
The debtor bought something but could not pay the full sale value right away, so the creditor agrees to be paid later or in installments.
Example 1: John Doe bought a new $50,000 truck from Auto Car Sales. He does not have the full $50,000, and he does not want to ask the bank for a loan, so Auto Car Sales agrees to let John make a down payment of $14,000 first and then $300/month for 10 years, with no interest (they were being very nice). Right after making the down payment, John, the debtor, has a debt of $36,000 owed to Auto Car Sales, the creditor. Every month after that, his debt goes down by $300 unless he misses a payment.
Example 2: John Doe wants to buy a $3,000 car from his sister, Jane Doe. They agree that John can pay $200 a month, with no interest and no down payment. John, the debtor, has a debt of $3,000 owed to Jane, the creditor.
Secured Debt
A debt is considered secured if the debtor agrees to give the creditor all or part of a property that the debtor already has, other than cash, if the debtor does not pay off their debt properly. The property that the debtor uses as collateral and agrees to give the creditor if the debt is not paid off is called security.
A brief example of a secured debt is when a debtor asks the bank for a loan and promises to make payments on time. However, if the debtor misses payments, the bank can repossess the home and sell it to pay out the loan. In this example, the bank is the creditor, and the debtor's house is the security used so that the debtor obtains a secured debt (the loan) to the bank.
Unsecured Debt
A debt is unsecured when no security is given as collateral by the debtor to borrow from the creditor. Often, unsecured loans involve less paperwork but are smaller in sum than secured loans. However, unsecured debts can be riskier as, if the debtor declares bankruptcy, dies, or disappears, the order of repayment begins with secured debts first.
Debt Repayment
If you are struggling with repaying your debt it is best to contact your creditors as soon as you can. You should make an attempt to come to an agreement with your creditors before they turn to a collections agency, who will try to collect the outstanding debt on behalf of the creditors.
Debt Repayment Agencies
Debt repayment agencies can be useful when contacting creditors. These agencies can help you negotiate and come to an arrangement with creditors for repaying your debt, but they will charge a fee for doing so. The employees acting for these agencies are called debt repayment agents. To operate debt repayment agencies must have a license. Specifically, the agency must hold a debt repayment agency licence, and their employees will need a debt repayment agent's licence. A debt repayment agent must renew their licence annually and present their licence to a debtor or creditor.
The agreement between the creditor and the debt repayment agency, acting on your behalf, is voluntary. A proposal by the debt repayment agency may not be accepted by the creditor, or it may be accepted but cancelled later if you fail to comply with the terms of the agreement. If either occur, then the creditor may turn to a collections agency to collect the unpaid amount. If a creditor has decided to reject the agency’s proposal or will no longer participate in the debt repayment agreement, the agency has 30 days to notify you of this decision once they are informed of it by the creditor.
Debt Repayment Contracts
The agreement that a debt repayment agency enters into, on your behalf, with your creditors must follow certain guidelines and include specific information, such as:
Be in writing.
Be dated and signed by you and the debt repayment agency.
Include both yours and the debt repayment agency’s name, telephone number, and address. The email address and fax number of the agency should also be included if available.
Describe the services that the agency will be providing you along with a list of prices that corresponds with these services.
State the creditors that will be paid under the contract.
Include the total amount owing, the amount per payment, a schedule of payments, and the number of payments that each creditor should receive.
Limitations on Debt Repayment Agencies
There are certain practices that debt repayment agencies are prohibited from doing, such as:
Entering into an agreement with you to accept money from you that is less than the amount you owe your creditors as a final settlement unless the creditors have agreed to this.
Giving anyone untrue or misleading information.
Not giving a written report of the status of the account to the individual for whom the debt repayment agency or agent is acting for.
Lending money to you in order for you to pay off your debts.
Discussing your debt with anyone other than yourself, your representative, your creditor, or a guarantor of your debt.
Making you pay a fee for an NSF (insufficient funds) cheque unless this was included in the debt repayment agreement.
Claiming breach of contract if you cancel the agreement with them.
Offering to pay you money or other compensation to enter into a debt repayment agreement.
Not providing the name of the agent and the agency as shown on each of their licences’ in all communications with the debtor and creditors, when collecting or trying to collect a debt.
Collecting a fee from the debtor unless written authorization by the debtor is given or an agreement in writing has been signed by the debtor and the debt repayment agency, and the debtor has been given a copy of the authorization or agreement.
Collections
Collection Agencies
Creditors may use a collection agency to try and collect money from debtors who have not been repaying their debt properly. Collectors are the employees of these agencies and perform debt collection, locate debtors within Alberta, and deal with debtors.
To operate collection agencies must have a license. Specifically, a collection agency must have a collection agency licence and their employees will need a collector's licence. A collector must renew their licence annually and present their licence to a debtor or creditor.
An agency can either hold a license for helping creditors in collecting debts owed or for helping debtors with debt repayment, but not for both. Similarly, their employees cannot hold both a collector's licence and a debt repayment agent's licence at the same time.
Tips for Identifying Legitimate Collection Agencies
If you are contacted by someone that appears to be representing a collection agency, you should make sure that the collection agency is legitimate. You can take the following steps to reduce your chances of being scammed:
Know that collection agencies must give you written notice or make a reasonable attempt to give you written notice before they try to collect unpaid debts from you.
If you are unsure whether the collection agency contacting you is legitimate, don’t provide them with your personal or financial information.
Ask for the company name, phone number, address, and website information.
Ask the individual that contacted you what organization they represent and for specific details of the debt.
Contact Service Alberta’s Consumer Contact Centre or the Better Business Bureau to check that the collection agency is real.
You can reach Service Alberta by phone at 780-427-4088 or Toll Free at 1-877-427-4088, and by email at servicealberta@gov.ab.ca
If the collections agency is recognized as a legitimate collection agency by either Service Alberta or the Better Business Bureau, then call the agency to confirm that they have contacted you.
If you think that you are being scammed, report this to the Canadian Anti-Fraud Centre by phone at 1-888-495-8501 or online through the Fraud Reporting System.
Limitations on Collection Agencies
Collection agencies and their employees can do many things to try and deal with collection; however, the Collection and Debt Repayment Practices Regulation does set out rules and limitations that prohibit certain practices, such as:
To act for a creditor, an agency must have a reasonable belief that the debtor actually owes the creditor money and that the money is overdue.
Agencies cannot charge their client fees beyond what they have discussed and approved.
Agencies acting for creditors cannot charge fees to a debtor other than the debt unless the debtor gives them a bounced cheque and the agency notified the debtor in writing that a fee would result from such a cheque before the cheque was submitted to the agency.
Agencies and employees must give a contact number where messages can be left, as well as their full name and license information on all correspondences to debtors and creditors.
Agencies must also give enough information to a debtor to ensure that they know who the creditor is, what the debt is for, and how much the debt is.
Agencies cannot make agreements or arrangements without their client's express consent.
Agencies must give written reports of the status of the account to their clients.
Agencies cannot contact debtors between 10pm and 7am in Alberta and must be reasonable in how they contact debtors as they cannot use misrepresentation, misleading information (even if they indirectly imply it), harassment, intimidation, or undue pressure tactics to get a debt repaid.
Agencies can contact those linked to the debtor only to obtain the contact information of the debtor, and they cannot share information about the debt with anyone other than the debtor, the debtor's representative, a creditor, or someone approved by the debtor to receive information.
Once an issue is going to court, agencies can contact the debtor's employer to confirm the employment status and information.
If a debtor has shown that they do not want to be contacted at work and are reasonably willing to discuss the debt elsewhere, the agency has to respect that.
Agencies cannot continue to collect or try to collect or communicate with people who have informed the agency that they are not the debtor unless the agency/collector has taken reasonable steps to confirm that the person is actually the debtor.
Agencies also cannot continue to collect or try to collect or communicate with a debtor if they have informed them that the debt is in dispute and the matter will be going to court.
Agencies cannot continue to contact a debtor if the debtor has provided written information that they have a representative who will be handling the issue of the debt on the debtor's behalf, along with the representative's contact information.
If no payments have been made and the debt has not been acknowledged in writing by the debtor for 6 years and there was no court order regarding the debt, an agency cannot pursue the debtor for this. The Limitations Act says that you cannot usually be sued after 2 years of non-payment or acknowledgement, but debt collector agencies may try to get you to agree to pay or acknowledge the debt after this limitations period has expired, up to 6 years after the last payment or acknowledgement.
Note that an acknowledgement must be given before the 2-year limitation period has expired to be valid. An acknowledgement can include any statement by the debtor which recognizes the existence of the debt, or any partial payment of the debt.
Civil Enforcement Agencies
Civil enforcement agencies are not the same thing as collection agencies. Civil enforcement agencies are guided by different statutes, the Civil Enforcement Act and the Civil Enforcement Regulation. While collection agencies try and collect debts without having to bring a matter to court, a civil enforcement agency is often the last resort to collect on debts. When a judgment from the Court is issued civil enforcement agencies will often help the creditor recover the debt.
In order to hire a civil enforcement agent a person must have a judgment obtained in court against the debtor. Or a person must have entered into a security agreement against a debtor that has a provision for civil enforcement.
If someone owes you money through a judgment from the courts, it can be helpful for you to get a ‘financial statement of debtor form’ from the person who owes you money (found here: https://albertacourts.ca/kb/areas-of-law/civil/forms). You can serve the debtor with the form, and they must respond within 15 days with correct and full information. This form requires the debtor to list where they work, any hobbies that make them income, and their assets. This allows a creditor to know when and/or where a debtor is receiving money form.
Bankruptcy and Insolvency
Bankruptcy
Filing for bankruptcy is a process outlined by the Bankruptcy and Insolvency Act. By filing for bankruptcy a person signs over all of their assets (with some exclusions) to a bankruptcy trustee, sometimes just referred to as a trustee. Actions from an unsecured creditor stop once a person declares bankruptcy.
For a person to apply for bankruptcy, they must be considered insolvent. To be insolvent, a person must owe at least over $1,000 and be unable to make payments on their debt as they become due or have liabilities that exceed their assets. An example of having liabilities exceeding assets would be if a person has lots of equity tied up in their home, but are unable to make their credit card or debt payments because they cannot access that money.
If the property is security for a loan, then the creditors could take that property. If a creditor did not receive any property from a person as security, then that creditor is an unsecured creditor. Upon filing for bankruptcy, an unsecured creditor may not commence or continue legal action against an individual for payment of the debt. The exception to this is if there is permission from the Court to lift the pause on proceedings which usually occurs where fraud is involved.
There are certain types of property that creditors cannot take including:
Food required for persons and their dependents for the next 12 months after declaring bankruptcy;
Necessary clothing for a person and their dependents up to a value of $4000;
Household furniture and appliances up to a value of $4000;
One motor vehicle not worth more than a value of $5000;
Medical and dental aides required by a person and their dependents;
If a person is a farmer, and their sole source of income is farming, creditors must leave the farmer with at least 160 acres of land;
Also, a farmer can keep any personal property for performing the farming work for 12 months after filing for bankruptcy.
The equity in a principal home, including a mobile home, up to $40,000;
If the person filing for bankruptcy is a co-owner, the amount taken is reduced to the proportion of what they own.
The personal property required for earning income can be retained by the person filing for bankruptcy up to $10,000 in value (i.e., tools, equipment, and books).
Applying for Bankruptcy
To file for bankruptcy, a person may want to first contact a bankruptcy trustee to determine if they are eligible for bankruptcy. A trustee usually charges for fees for services depending on how long they spend on a case. As well, if a person chooses to file for bankruptcy, a bankruptcy trustee will assist them in filing the necessary document with the court.
In Alberta, an individual can voluntarily seek a Consolidation Order (also referred to as Orderly Payments of Debt). The Alberta Court of Justice would combine all of the person’s debt and choose how much a person must pay back to each creditor. The person would pay the determined amount to the court, and the court would make the payments on the individual’s behalf.
When a person files for bankruptcy they are allowed a base amount for living expenses. If a person earns more than this base amount, called surplus income, then the trustee takes that money to pay the creditors. This surplus income includes any money received from tax returns and any money earned from selling assets. The trustee will also take their fee from the surplus income.
After a person declares bankruptcy, they must provide a list of assets, liabilities, creditors, securities, and monthly income and expenses to their trustee.
Anyone who declares bankruptcy must inform existing creditors and any future creditors or business partners that they have declared bankruptcy. If a person does not do this, they could be guilty of an offense and be liable to serve up to a year of imprisonment.
After a person declares bankruptcy, they may receive a discharge within 9 months, depending on their conduct in the bankruptcy, whether any creditors oppose the discharge, and whether you have to make surplus income payments. However, if a person has declared bankruptcy more than once, then this period could be longer. During the bankruptcy period, a person must pay a certain amount of money (depending on what they discuss with the trustee) each month to their various creditors. If a creditor can prove a claim then they will be part of the bankruptcy.
Once the bankruptcy period is over, the trustee can file for a discharge, which ends the period of bankruptcy. All remaining debt owed to creditors up to the filing for bankruptcy is wiped out, subject to certain exceptions (some examples would be spousal and child support and student loans etc,). However, a creditor can oppose a discharge and attempt to get further payment.
A person’s Credit Bureau will reflect the bankruptcy for about 7 years for your first bankruptcy, and 14 years for subsequent bankruptcies.
Court fines, child and spousal support, debts incurred by fraud and debts incurred during bankruptcy are not discharged through bankruptcy.
Alternatives to Bankruptcy
There may be other ways to solve a financial problem, such as talking to creditors directly to see if they will accept less for the debt owed. Also, an individual may speak to the loans manager at a bank to consolidate their debt. However, these are informal agreements, and may not necessarily be legally binding.
A person may also be able to contact Money Mentors (Ph: 1-888-294-0076). This program has counselors who help in finding other ways instead of declaring bankruptcy to pay off debt. This program offers the Orderly Payment of Debts Program which assists individuals in making payment schedules that satisfy the creditors. The program schedules are based on a person’s cash flow and will have a fixed interest rate. With this program, a person is able to pay their debt in full with the assistance of a debt counselor. If a person is part of this program, they are protected from certain legal actions (i.e. garnishing wages).
If the creditor refuses the payment schedule, then the counselors can apply for a Consolidation Order through the Court. The creditor will have 30 days to object to the Order. After the Order is approved, an individual begins monthly payments to the Credit Counselling Services of Alberta who then makes the payments to the creditors on behalf of the individual.
Alternatives to Bankruptcy: Consumer Proposals
A common alternative to filing for bankruptcy for people with total debts that do not exceed $250,000 is a consumer proposal. The benefits of this program are that actions against a person from unsecured creditors are stopped, and a person can keep their assets.
A consumer proposal is a binding legal process outlined in the Bankruptcy and Insolvency Act that is started with the assistance of a Licensed Insolvency Trustee. For this process, the trustee will create a ‘proposal’ which offers creditors a lower payment overall. The term of payments for a consumer proposal cannot exceed five years. A trustee accepts the payments and in turn, pays the creditors.
When a person files a consumer proposal they must:
Give the trustee a complete list of all of their assets (property) and liabilities (debts)
Attend a meeting with the creditors (only if a meeting is requested)
Commit to attend two financial counseling sessions
Let the trustee know in writing of any address change
Assist the trustee in creating the proposal
If a person wishes to file a consumer proposal, they must contact a trustee. The trustee will file the consumer proposal. At this point, the individual no longer has to make payments to the unsecured creditors. As well, any garnishments of wages are stopped. The trustee will also submit the proposal to creditors. The creditors have 45 days to accept or reject the proposal, this can happen either before or during the meeting of the creditors. The meeting of the creditors includes anyone who owns at least 25% of the debt. At the meeting, creditors vote to either accept or refuse the proposal.
Once a person’s consumer proposal is accepted, they are:
Responsible for making payments to the trustee according to the agreement;
Responsible for following the terms of the proposal;
Able to retain their assets; and
Required to attend two financial counseling sessions.
If a person's proposal is not accepted, they may:
Change their proposal, and resubmit it;
Research other ways to solve their financial problems; or
Declare bankruptcy.
When a person files for a consumer proposal, they are automatically assigned the lowest possible credit score. The person may be able to qualify for credit at their financial institution, but it is unlikely.
Once a person meets all of the conditions of the proposal (including all payments), they will be legally released from the debts in the proposal. However, if a person missed more than three payments, the proposal can be annulled. This means that creditors would be able to request the entire debt remaining. Under certain conditions, a proposal may be revived.
A Division I Proposal is another option that is similar to a Consumer Proposal. However, there is no limit on what can be owed.
WHO CAN I CALL FOR MORE HELP OR INFORMATION?
Legal Resources
Money Mentors
Edmonton: Quikcard Centre, Suite 175, 17010 – 103 Avenue, Edmonton, AB T5S 1K7
Calgary:140, 109 Quarry Park Blvd SE, Calgary, AB, T2C 5E7
Red Deer:
Suite 104, 6740 Johnstone Drive Red Deer, AB, T4P 3Y2
Medicine Hat: 640, 3 St SE, Medicine Hat, AB, T1A 0H5
Ph: 1-888-294-0076
Web: https://moneymentors.ca/
Money Mentors is a not-for-profit organization in Alberta that helps people dealing with financial issues or who want to get better at managing their finances.
Licensed Insolvency Trustees
Web: https://www.ic.gc.ca/app/scr/tds/web/?lang=eng
This Federal registry of Licensed Insolvency Trustees can be helpful to find a trustee in your area who can help you manage debt problems and give you advice on bankruptcy, consumer proposals, or other means to deal with debt.