FAQ Answered: What Is a Debt Collection Agency?
By Garrett Johnson
We get asked many questions about debt collection, and often times the first thing someone asks is, “What is a debt collection agency?” A debt collection agency is a company that helps lenders recover money that is owing on past due accounts. An agency can be hired by a creditor to collect on the lender’s behalf, or the agency might buy delinquent accounts from credit card companies, utility providers, and other lenders or service providers. Collection agencies do not lend money; they simply collect unpaid debt in a way that follows provincial and federal regulations. In this FAQ article we will explore more of the questions people frequently ask about debt collection agencies.
What Does a Debt Collection Agency Do?
When going over what a debt collection agency does, try not to let your stress get the best of you. Simply put: Debt collection agencies facilitate the collection of overdue debts by handling the process of contacting debtors, negotiating repayment, and ensuring that a borrower follows through with the repayment plan. Some lenders have internal collections departments which handle overdue accounts directly before a third-party agency is involved.
In some cases, a third-party debt collection agency collects the debt on behalf of the original creditor. That means that the lender still owns the debt – and the right to pursue a debtor legally – but has hired the agency to manage collection efforts. In other cases, the debt may be sold to the agency. This typically happens with older accounts that are deemed uncollectable. In buying the debt, the agency becomes the new owner of the account. This gives the agency full control over any and all payment arrangements and legal proceedings pertaining to that debt. It also means a debtor must negotiate directly with the debt collector and not forward any payments to the original creditor.
If you are contacted about an overdue debt, it can be confusing to figure out which debt the agency is contacting you about because debts can be sold from one agency to another as well. In addition, if you moved within Canada after you took on the debt, where you currently reside determines which debt collection rules an agency must follow. Debt collectors may send letters, make phone calls, or send emails to remind debtors of the money owed and discuss payment arrangements. They may also report debt to the credit bureaus, which can affect a borrower’s credit score.
If repayment cannot be arranged, they may escalate the matter to legal action, such as filing a claim in court to obtain a judgement. Throughout the process, debt collectors are required to operate within federal and provincial laws that prevent harassment, threats, or other unfair practices, ensuring debtors are treated fairly while creditors attempt to recover the money owed.
How to Deal With Collection Agents & Regain Control of Your Pay Cheque
What is the Statute of Limitations on Collections?
The statute of limitations on collections is the time period during which legal action can be initiated to collect on a debt. Legal action can be initiated by any entity who is owed money: It could be a lender, collection agency, service provider, or even an individual. In Canada, limitation periods vary by province from 2 to 6 years and by type of debt, and once the period expires, legal action generally may not be commenced. However, collectors may still contact you to request payment, even if the statute of limitation has passed.
It’s important to know your province’s rules because certain actions, such as making a payment or acknowledging the debt verbally or in writing by letter or email, could restart the limitation period, giving the agency or lender a new opportunity to pursue collection through the courts.
How Long Does Collections Stay on My Credit Report?
Also keep in mind that just because a lender or agency loses the ability to pursue you legally for a debt, the debt doesn’t automatically disappear. The debt will remain on your credit reports for 6-7 years from the date of last activity (e.g. when you paid, used, or acknowledged the debt). Your debt will also survive in the computer system of the creditor, making it difficult or impossible to deal with that lender or service provider again in the near future.
Get Your Free Credit Report in Canada
Can a Collection Agency Take You to Court?
Yes, a collection agency can take you to court over a debt if it is within the statute of limitation and if they have the legal authority to do so. In addition, if the debt is still legally enforceable and negotiations to repay it fail, the agency may choose to file a claim in court to obtain a judgement requiring repayment.
Once a court judgment is obtained, the agency may be able to enforce it through wage garnishment, seizing funds from bank accounts, or placing liens on property. Provincial laws determine how these actions can be carried out and what exemptions may apply, so understanding your rights and options is important if you are facing potential legal action.
What To Do When You Get a Notice of Claim
Can Debt Collectors Garnish Your Wages?
In Canada, a collection agency cannot garnish your wages simply by contacting you. However, if a collector takes legal action and obtains a court judgement, they may be able to enforce repayment through wage garnishment. If they do take legal action, you will receive official communication from a courthouse. The rules and exemptions vary by province, and some types of income are protected. If you do receive a notice of claim or legal action, you must respond by the deadline given in the letter. It is best to talk to an accredited credit counsellor and seek legal advice.
Can Debt Collection Companies Charge Interest?
People often wonder if collection companies charge interest on a debt. The answer is yes, but the amount depends on if they are collecting on behalf of the original creditor or if the collection company bought the debt. When they are collecting for the original creditor, the interest accrues at the interest rate charged by the original creditor. This rate is disclosed in your cost of borrowing and credit disclosure documents that you received when you borrowed the money or took on the new credit card.
If the collection agency bought the debt, they may charge a higher rate of interest according to their policies, as long as they stay below the legal limit. Debt collectors are not allowed to invent additional charges, so it’s important to read the terms and conditions of your contracts to see what fees and interest may apply to your debts.
How Do I Pay a Collection Agency?
Many Canadians ask, ‘How do I pay a collection agency if I owe a debt?” A debt collector will encourage you to make your payment quickly, so before making any payment, it’s a good idea to speak with one of our credit counsellors for free to review all your options and understand all of the pros and cons with different payment choices.
If you decide to pay a collection agency directly, it’s important to have them confirm in writing ahead of time who the original account holder is because you don’t want to end up paying someone else’s debt, that they have the legal right to collect for the debt, how much is owed, and if you make a settlement, that it will be reported as ‘paid in full’ to both of the credit bureau companies once the payment has been processed. Taking these steps helps protect you from errors, overpayment, or inaccurate reporting and allows you to verify what you were told should a mistake need to be corrected.
Wrapping Up the FAQs About Collection Agencies and How to Get Help
Dealing with debt collectors and collection agencies can be stressful, but understanding your rights and responsibilities can make the process more manageable. If you have questions about your options or need guidance on how to handle communicating with debt collection agencies, we have a comprehensive guide and sample letter templates that most people find really helpful. If you have more questions, reach out to us and we’ll be happy to provide free, confidential support tailored to your situation. With the right information, you can take control of your finances and resolve your debts in a safe and informed way.
Last Updated on January 16, 2026
