Can a Collection Agency Take You to Court?

If you've fallen behind on a debt, the possibility of being taken to court is probably somewhere on your mind. It's a fair question, and the answer is more reassuring than you might expect.

Yes, a collection agency can sue you in Canada, but most don't want to. Litigation is slow, expensive, and far from guaranteed to recover anything. Knowing when an agency is likely to take legal action, and what to do if it does, puts you back in control.

In this article, we’ll explore what to expect from creditors, when they’re likely to take you to court, and what to do if they do. 

When Will a Collection Agency Take You to Court?

Lawsuits are rarely the first step when an account falls behind.  This is often because court filings come with real costs: filing fees, process serving, and legal representation. The collection agency must first decide whether the potential recovery justifies its expenses.

They are unlikely to take you to court if:

• Your debt is too small. On minor balances, the cost of obtaining and enforcing a judgment outweighs the recovery.
• Your debt is time-barred. In most provinces, creditors have two years from the date of default, your last payment, or your last written acknowledgment of the debt. Once that window closes (known in legal terms as time-barred), the creditor is unlikely to win a court judgment, but your debt remains and collection calls will continue. If you make even a small payment of $5 towards your debt, the clock is reset. 
• You live outside Canada. Serving legal documents internationally creates logistical and legal hurdles.
• You're "judgment-proof." No garnishable income and no seizable assets mean a successful judgment still can't be enforced.

Being "judgment-proof" typically applies when your sole income comes from exempt government benefits (like provincial social assistance, disability support, or the Canada Child Benefit). While these government benefits are legally exempt from garnishment at the source, if a creditor obtains a bank garnishment order, the bank may first be ordered to freeze the account. You would then have to prove to the court or bank that the funds are exempt to unlock them.

It also applies to those who don't own real estate or significant assets. Regardless, a collection agency can technically sue you, but if you have no assets to collect, they’re unlikely to win their money back from judgment. 

Can I Ignore a Collection Agency?

It might be tempting to ignore a collection agency’s calls, but we don’t recommend it. Unanswered calls and unopened letters don't make the debt disappear. These actions tell the collector that voluntary settlement isn't possible, which often pushes them toward formal legal action faster.

In most provinces, you can reduce collection phone calls with a formal written request asking the agency to communicate only in writing. This doesn't stop collection communications, however, just the phone calls. 

Ignoring a court document is riskier. If a collection agency sues you, you'll be handed a document called a Statement of Claim. You then have a short window (usually 15-21 days, depending on the province)to file your written response, called a Statement of Defence. 

If you don't file the Statement of Defence, the agency can apply for a default judgment. This can mean wage garnishments or bank account freezes and losing your right to a hearing or trial.  The court would still be involved, but only for the creditor to file the documents and have the judge or clerk sign off on the judgment. The better path is to know how to stop collection calls through legitimate channels and keep communication open. Creditors generally prefer to recover something over nothing.

What Happens If You Don't Pay a Collection Agency?

When a debt goes unpaid, the next steps are usually predictable. First, your original creditor will continue trying to collect your overdue payments directly.

If your balance remains unpaid for over 90 to 180 days, the account may be assigned to a third-party collection agency. This agency will try to collect payment from you directly and may begin submitting reports (your credit records) to Equifax and TransUnion, Canada’s two main credit bureaus. In addition to any existing credit issues affecting your report, the collection agency also adds a dedicated collection entry on the credit report. 

If that fails, and your debt meets the criteria, they may pursue legal action to collect the overdue payment. 

Learn more about what collection agencies can do and what falls outside their legal rights.

How Collection Agencies Get Assigned Your Debt

Collection agencies acquire your debt in different ways:

• The original creditor retains ownership and hires a third-party agency to collect on commission, typically 25% to 50% of the funds recovered. The agency needs creditor approval before accepting a settlement or filing a lawsuit.
• Debt buyers purchase your debt for a fraction of what you owe. They collect aggressively and may sue if the balance is large and you’re employed. But because they paid so little, they're often willing to settle for a lump sum well below what you owe.
  

Can a Collection Agency Garnish Your Wages Without a Court Order?

A collection agency cannot garnish your wages without a court order. Four things have to happen first, in this order: 

1. The agency sues you.
2. The deadline to file your defence passes.
3. A judgment is granted by the court (often by a court clerk for default judgments).
4. The creditor files a Notice of Garnishment with your employer using that court order.

If they garnish your wages, they can only garnish up to 20-30% of your net pay.

Two government bodies can bypass that process entirely:

• The Canada Revenue Agency. For unpaid taxes or overpaid government benefits, the CRA can send a Requirement to Pay straight to your employer or your bank. No lawsuit, no judgment, no warning to you first.
• Provincial family support enforcement. Programs like Ontario's Family Responsibility Office or Alberta's Maintenance Enforcement Program can issue Support Deduction Notices to collect court-ordered overdue child or spousal support without a new lawsuit.

What about secured creditors? A lender holding security on an asset (like a car loan or mortgage) can repossess and sell that asset when you default, without going to court. That's not wage garnishment, though. 

If you default on a secured loan, the lender can repossess and sell the asset (like a car) without going to court. However, repossession is not wage garnishment. If selling the asset does not cover your full loan balance, your situation differs depending on your province:

• In Ontario and Eastern Canada, the lender can sue you in court to collect the remaining shortfall (deficiency balance).
• In Alberta and British Columbia, provincial "Seize or Sue" laws mean that if the lender chooses to repossess the asset, they give up the right to sue you for any remaining debt.

Can You Go to Jail for Not Paying Debt in Canada?

No, you cannot be jailed for owing money in Canada. If a collector has hinted otherwise, they were either wrong or trying to frighten you. Collection agencies are barred from threatening jail time.

Unpaid credit cards, personal loans, and payday loans are civil matters. Canadian law treats them as a debt to be repaid, not a crime to be punished, and there's no version of falling behind on a bill that ends in a jail cell.

The one narrow exception has nothing to do with the debt. If a creditor wins a judgment against you, the court can order you to appear and answer questions about your income and assets. If you ignore that court summons, the judge can issue a Warrant for Arrest for contempt of court and failure to appear.  In this case, the court punishes your no-show, not the money you owe. 

What Is the Minimum Amount That a Collection Agency Will Sue For?

There's no minimum amount you have to owe before someone can file a civil claim in Canada. Instead, each court level has a ceiling, set by the provinces. Small claims limits range widely:

• Up to $100,000 in Alberta
• $50,000 in Ontario
• $35,000 in B.C.
• $15,000 in Quebec
• $20,000 in Manitoba
• $16,000 in PEI
• $50,000 in Saskatchewan

Most agencies won't pursue collection for balances under $1,500 to $2,000 because the costs of suing are equal to or more than what they’d collect. Once your balance is above $5,000, though, the odds of a lawsuit go up.

Here's roughly what an agency is looking at before it decides to file:

• Court filing fees run $100 to $300+
• Process serving costs $50 to $150 
• Paralegal or volume legal services costs can vary. 

How Long Can a Collection Agency Collect on a Debt in Canada?

Technically, a collection agency can keep trying to collect your debt indefinitely. In reality, their legal ability to enforce it changes over time based on the credit bureau reporting limits and provincial statute of limitations.

Credit Bureau Reporting Limits

Delinquent accounts remain on your Equifax and TransUnion credit reports for six to seven years from the date of your first missed payment. 

These are set by each province and refer to the time from the date of default, your last voluntary payment, or the last time you acknowledged the debt in writing, whichever is most recent. Once the statute of limitations expires, the debt becomes "time-barred," and collectors can no longer win a court judgment against you even if they keep calling. 

Collection agencies can legally continue contacting a debtor to request voluntary payment indefinitely, even on time-barred debt, unless the consumer formally submits a written request to stop phone contact or communicate only in writing.

Here are examples of how long the Statute of Limitations lasts in each province and territory:

For more on when agencies stop pursuing debts, see our provincial guide to when collection agencies give up.

Watch Out for Re-Aging Your Debt

Two things restart the legal lawsuit clock, giving the creditor a fresh window to sue from that date:

• Making any payment on the debt, even a small one
• Acknowledging in writing that you owe it

Timing is everything here. A payment or written acknowledgment only restarts the clock if it happens before the limitation period runs out. Once the period has expired, a payment or an admission generally cannot revive the creditor's right to sue.

This is exactly why collectors call about very old debts and push for "just $20 to show good faith." If your debt is close to the limit, don't confirm the balance in writing or send a payment before getting advice, as you could be handing back a right the creditor had already lost.

Restarting the clock doesn't affect credit report damage. Equifax and TransUnion calculate purge dates based strictly on the original date of initial default/delinquency.

Canada Student Loans, CRA tax debts, and court-ordered support run under different rules and may carry longer limitation periods, or none at all.

How to Respond to a Lawsuit From a Collection Agency

If a collection agency sues you, you'll be given court paperwork, usually called a Statement of Claim or a Notice of Claim. The rules say it has to be handed to you directly, left with an adult in your household, or sent by registered mail or courier with someone signing for it. The exact rules vary by province.

If you find a claim left at your door with no one present, that may not be proper service, but don't ignore it. Take it to a lawyer or call a Credit Counsellor and find out where you stand.

Once you receive this paperwork, you’ve been  "served," and your clock starts. You have 15 to 21 calendar days to respond, depending on your province.

1. Read the paperwork carefully. Check who's actually suing you (the agency or the original creditor), the exact amount they say you owe, and the story they tell about the debt. Errors are common, especially on debts sold from one company to another. 

Minor clerical errors (typos in names, addresses, and minor calculations) will not throw out your case. More significant errors (wrong debtor name, expired statute of limitations, incorrect amount owed, served to the wrong person) need to be addressed, and your lawyer can prepare the correct paperwork.

2. Look for reasons the claim may fail. You don't need a lawyer to spot the three most common ones:

• The debt is too old. If the limitation period in your province has expired, the agency can't win, but only if you say so in your response.
• The amount is wrong. Padded interest, fees you never agreed to, or payments you made that weren't credited.
• They can't prove they own it. An agency that bought your debt must show paperwork proving the debt was actually transferred to them. Sometimes it can't.

3. File your response. In most provinces, you must serve the plaintiff first, then file the Defence with the court along with an Affidavit of Service. Get a Statement of Defence form from your local Small Claims Court website or office. In most provinces, filing your response requires three steps:

1. Fill out the form clearly stating your defences or disputing the amount.

2. Serve a copy to the plaintiff (or their legal representative) via registered mail or process server.

3. File the Defence with the court along with proof of service (an Affidavit of Service) and the required court filing fee (typically under $100 depending on the province).

Where Can You Find Help If a Collection Agency Takes You to Court?

Credit Canada's certified Credit Counsellors can review your collection notices and help you understand your options, free of charge. Call us at 1 (800) 267-2272.

Provincial legal aid programs serve unrepresented individuals across Canada: 

• Legal Aid Ontario
• Pro Bono Ontario Hotline
• Small Claims Duty Counsel in Ontario
• Legal Aid BC and Community Legal Assistance Society in BC
• Legal Aid Alberta
• Commission des Services Juridiques in Québec
• Other legal aid bodies in every Atlantic province, Prairie province, and territory

Certified Credit Counsellors vs. Licensed Insolvency Trustees

A certified Credit Counsellor can provide advice and support, but cannot intervene in court proceedings. As Mike Bergeron, Counselling and Client Services Manager at Credit Canada, explains:

"[Our Credit Counsellors] can provide guidance on the process, explain their available options, and help them understand the next steps. Often, a clear explanation of the legal process, along with a discussion of potential solutions outside of court, can significantly reduce a client's fear, uncertainty, and stress."

A Licensed Insolvency Trustee (LIT) works under different authority. They can help you file a consumer proposal or personal bankruptcy to trigger an immediate, automatic stay of proceedings, halting all pending lawsuits, stopping collection activities (including contacting you), and blocking wage garnishments. 

A free call with a Credit Counsellor at Credit Canada is often the right first step to understand which path makes the most sense. Call us anytime for a confidential consultation at 1 (800) 267-2272.

What to Do and What Not to Do When Facing a Collection Lawsuit

It can feel overwhelming when you’re served with a debt collection lawsuit. Your next steps are important and manageable, especially if you seek help from a credit counsellor at a non-profit agency.  

Verifying the Debt Before You Pay

Before paying anything or agreeing to a settlement, request formal debt validation in writing. Ask for:

• The original creditor's name
• The total balance owing
• A breakdown of accrued interest
• The date of the last account activity
  

Also confirm that the collection agency holds a valid provincial licence, and ensure any settlement agreement commits in writing to reporting the debt as “Settled” with no remaining balance owing. to Equifax and TransUnion.

Bergeron’s advice is: "Having a debt go to collections is not easy to deal with in many ways, but knowing your rights and responsibilities is truly important to recovering from it."

Other Common Mistakes to Avoid

While navigating this debt collection process can feel overwhelming and stressful, taking proactive steps to manage your circumstances is essential to prevent future complications. Here are other common mistakes we see Canadians make when faced with debt collection:

• Ignoring communication. Stay in the know so you don’t miss important updates, such as when your account is nearing litigation or has been sold to a more aggressive collection agency.
• Paying without written proof. Without written confirmation of the settlement terms, you may be subject to ongoing demands.
• Skipping the follow-up. Before you pay, get the settlement terms in writing and confirm the agency will report the account as settled to both credit bureaus.
• Missing credit report updates. Check your Equifax and TransUnion reports 30 to 60 days post-settlement to ensure your debt repayment has been properly recorded.

Potential Outcomes of a Debt Collection Lawsuit

When a collection lawsuit moves through the civil court system, it typically resolves in one of five ways: 

1. You win and pay nothing (if the debt is time-barred, paid, or the collection agency can't prove ownership).
2. The court issues a default judgment against you for missing the Statement of Defence deadline.
3. You negotiate an out-of-court settlement at a reduced amount.
4. The creditor wins and obtains a Garnishment Order directing your employer to deduct 20% to 50% of your net pay.
5. The creditor secures a Writ of Enforcement to freeze your bank accounts or seize non-exempt assets like a secondary vehicle or real estate equity.

Your lawyer or credit counsellor can help guide you through each of these outcomes. 

Investigate Your Debt Relief Options

If you're dealing with collection activity or facing potential legal action, it's worth understanding your options early:

• A Debt Consolidation Program (DCP, also known as a Debt Management Plan or DMP) through a certified credit counselling agency consolidates your unsecured balances into a single monthly payment at reduced or zero interest. It requires voluntary creditor participation and doesn't stop an active lawsuit, but it's often the right first step for people not yet at the insolvency stage.
• A consumer proposal is a formal offer to pay creditors a portion of what you owe over up to five years. It’s administered by a Licensed Insolvency Trustee. Filing a consumer proposal triggers an immediate stay of proceedings, freezing all lawsuits and collection contact.
• Personal bankruptcy works similarly to a consumer proposal. The stay is automatic upon filing, non-exempt assets are liquidated, and a discharge typically follows in nine to 21 months.

Reach out to a certified Credit Counsellor at Credit Canada at 1 (800) 267-2272 to explore your debt relief options. It’s free, confidential, and judgment-free. You can also chat with Mariposa, our AI-powered debt management agent, to start exploring your options at your own pace.